The Bank of Israel's Monetary program for March 2000

February 21, 2000

Monetary program for March 2000

The Bank of Israel announced its monetary program for March 2000 today, according to which its interest rate will be reduced by 0.4 percentage points.

The Bank of Israel pointed out that this reduction is consistent with attaining the government's inflation target, and hence also supports attaining the government's other targets, without jeopardizing the attainment of the inflation target. The Bank of Israel stressed that attaining the government's inflation target, within the framework of striving for price stability over time, creates the infrastructure necessary for sustainable growth. The Bank of Israel explained that the reduction of the interest rate is a continuation of the process of interest-rate reduction that was implemented recently and that depends on the consolidation of the path of expected inflation for the one- and two-year periods ahead in a way that is consistent with 4 percent for סattaining the government's inflation target of an annual rate of 3 the years 2000 and 2001. This consolidation depends on the absence of exogenous shocks in the area of inflation, such as the upward trend of global interest rates and its implications for capital flows, on the one hand, and for the management of the public's portfolio of assets and liabilities and repercussions on Israel's financial markets, on the other. In this context, the Bank of Israel noted that in view of the current currency composition of the foreign-currency assets and liabilities held by the public, as well as of the capital flows to and from Israel, the dollar interest rate is the main substitute for local-currency interest, and hence referring to interest-rate spreads means referring to the spread between dollar and local-currency interest plus the risk premium for Israel-as measured in the international capital markets-and exchange-rate risk. The Bank of Israel pointed out that the interest-rate spreads, as referred to here, are narrowing.

The Bank of Israel stressed that the assessment of expected inflation for an horizon of one and two years is the basis for making decisions regarding the interest rate, in view of the government's decision regarding the inflation target for the next two years. The assessment of inflation is based primarily on analyzing the various inflation forecasts for a period of a year or more, which are based on various indicators, e.g., inflation expectations, exchange-rate developments, the rise in the money supply, price trends abroad, the nature of fiscal policy, and the level of real economic activity. In this context, the Bank of Israel noted that the analysis of the data published in the various fields for a given month-including the last one-is relevant for the decision regarding the monthly interest rate only if it can affect the assessment of the inflation rate forecast for a one-and two-year horizon. The monthly data themselves do not constitute an adequate basis for assessing inflation for this horizon, or for making the monthly interest-rate policy decision.