Bank of Israel keeps interest rate unchanged, citing strengthening shekel

The Bank of Israel (BoI) in its first monetary policy meeting of 2017 on Monday maintained interest rates at record low of 0.10 percent, as widely expected following strengthening shekel and rising home prices. The benchmark interest rate has been unchanged since March 2015 when the central bank lowered its interest rate to historic low.

The decision to keep the interest rate unchanged at 0.10 percent is consistent with the Bank of Israel's monetary policy, which is intended to return the inflation rate to within the price stability target range of 1–3 percent a year, and to support growth while maintaining financial stability.

The Monetary Committee continues to assess that in view of the inflation environment, and of developments in the global economy, in the exchange rate, as well as in monetary policies of major central banks, monetary policy will remain accommodative for a considerable time.

The CPI for December was unchanged, in line with expectations. The inflation rate was negative in 2016, but is on an upward trend. The picture of real economic activity remains positive. The Composite State of the Economy Index increased by 0.45 percent in December, and the Net Balance in the fourth quarter Companies Survey indicates high growth of business sector product. Foreign trade data indicate a recovery of manufacturing exports, after a prolonged decline since 2014. The picture conveyed by the labour market remains very positive, and the increase in employment and wages was led by the business sector in the past year.

On the other hand, the central bank keeps its interest rate steady as home prices continue to climb rapidly, despite a high level of unsold new homes, a decline in monthly mortgage volume, and a continued increase in mortgage interest rates.

Lastly, the BoI in its monetary policy statement mentioned that the Monetary Committee is of the opinion that the risks to achieving the inflation target remain high, yet the increases in wages and in global inflation are expected to support the return of inflation to the target. The Bank of Israel will continue to monitor developments in the Israeli and global economies and in financial markets.

The central bank will use the tools available to it to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, and in this regard will continue to keep a close watch on developments in the asset markets, including the housing market.