The Bank of Israel's Monetary program for May 2000

April 24, 2000

Monetary program for May 2000

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

The Bank of Israel noted that this reduction of the interest rate 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 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 also noted that there are dangers in the area of inflation that are influenced inter alia by the rapidly declining trend of the interest-rate spread between Israel and abroad-against the backdrop of the reduction of local-currency interest and rise in dollar interest-and its implications for capital flows and the management of the public's assets and liabilities portfolio, and thus on Israel's financial markets. The Bank of Israel pointed out in this context that the dollar interest rate is the main substitute for the local-currency interest rate in view of the current currency composition of the foreign-currency assets and liabilities held by the public, as well as of capital flows to and from Israel.

The Bank of Israel noted that while recent developments in international capital markets-especially in the U.S.-increase uncertainty and the level of financial risk in the securities and foreign-currency markets, they do not at present have implications for expected inflation in Israel for the next one- and two-year periods, or for its direction-and hence for the policy required today in order to attain the government's inflation target. The Bank of Israel will continue, as in the past, to monitor these developments, primarily in order to analyze their implications for inflation and the economy. The Bank of Israel also explained that a significant part of the exceptional rise principally of current ףin the money supply (M1) in the first quarter of 2000 because some of the commercial banks ףdeposits, which constitute part of M1 have begun to offer institutional investors (e.g., mutual and provident funds) current deposits bearing a daily interest-rate equivalent to that on SROs, which are not part of M1. The Bank of Israel noted that the significant recent increase in the resort to this financial instrument is connected primarily with the large deposits implemented by the public in the local-currency mutual funds-which direct daily balances from the money accrued in them to these deposits. The banks' reports to the Bank of Israel on current deposits have not noted this component to date, and the Bank of Israel has made preparations for obtaining reports which will make it possible to publish an approximation of current developments in M1, without these deposits.

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-relies mainly on an analysis of the various economic developments and their long-term implications. Data such as the Consumer Price Index, exchange-rate shifts, fluctuations in the capital markets, and inflation expectations-which are correct for a given week or month, including the most recent one, and certainly for several retroactively-are not a sufficient basis for assessing inflation for the coming year or two, and hence are not relevant for monthly decisions regarding the interest-rate policy, unless they embody clear repercussions for the path of inflation for the coming year or two.


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
May
-0.3
**
Interest level in May 2000
9.30
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.
** The Open Market Committee of the US Federal Reserve is set to convene in May for its regular review of interest-rate policy. The current Federal Reserve interest rate, prior to the review, is 6 percent.