The Bank of Israel's Monetary program for April 2000

March 27, 2000



Monetary program for April 2000

The Bank of Israel announced its monetary program for April 2000 today, according to which its interest rate will be reduced by 0.3 percentage points.

The Bank of Israel pointed out that this reduction is consistent with attaining the government's inflation target of an annual rate of 3 - 4 percent for the years 2000 and 2001, and hence, together with previous interest-rate reductions implemented in view of the consolidation of the path of expected inflation in the next one and two years, is consistent with the attainment of that target. The Bank of Israel pointed out that this interest-rate reduction 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, in the framework of striving for price stability over time, creates the infrastructure necessary for sustainable growth.

The Bank of Israel also explained that the decision as to changing the rate of change of the interest rate-which is decided each month in accordance with the changing circumstances in the field of assessing expected inflation for the coming one- and two-year periods-reflects several developments this month which imply uncertainty regarding inflation. The Bank of Israel noted in this context the rapidly declining trend of the interest-rate spread between Israel and abroad-against the backdrop of the persistent rise in the dollar interest rate and decline in local-currency interest-and its implications for capital flows and the management of the public's portfolio of assets and liabilities, as well as for Israel's financial markets. The Bank of Israel pointed out that the dollar interest rate is the main substitute for local-currency interest, in view of the current currency composition of the foreign-currency assets and liabilities held by the public and of capital flows to and from Israel. In addition, the money supply grew rapidly in the last year-beyond the rate that is consistent with the government's inflation target, there has been an ongoing change for several months in the composition of unindexed local-currency deposits (reflected in the falling share of long-term deposits and parallel rise in that of short-term deposits), and questions have arisen regarding the stability of the foreign-currency market.

The Bank of Israel repeated that the assessment regarding expected inflation for the next one- and two-year periods-which constitutes the basis for interest-rate decisions-rests primarily on the analysis of various long-term economic developments rather than on data for a given month, including the last one. The monthly data themselves do not constitute an adequate basis for assessing inflation for the horizon that is relevant for the government's target, or for making the monthly interest-rate policy decision aimed at attaining that target.



Changes in the Interest Rates of the Central Banks of Israel and the US*

ISRAEL
US
Interest level in December 1998
13.50
4.75
Change in interest rate in 1999
January
0
0
February
0
0
March
-0.5
0
April
-0.5
0
May
-0.5
0
June
0
0.25
July
0
0
August
-0.5
0.25
September
0
0
October
0
0
November
0
0.25
December
-0.3
0
Change in interest rate in 2000
January
-0.5
0
February
-0.4
0.25
March
-0.4
0.25
April
-0.3
Interest level in April 2000
9.60
6.00
*The comparison of interest rates requires referring also to Israel's country risk, which ranges in the market from 1 percent to 1.5 percent.