The Bank of Israel's Monetary program for July 2000



June 26, 2000
The Bank of Israel today announced its monetary program for July 2000, according to which its interest rate will remain unchanged

The Bank of Israel noted that the decision to leave the nominal interest rate unchanged is consistent with the attainment of the government's inflation target of an annual rate of 3 to 4 percent for the years 2000 and 2001. Since interest-rate policy affects prices with varying lags, and in order to limit interest-rate fluctuations and subsequent inflation-rate volatility, the Bank of Israel administer interest-rate policy on a monthly basis while assessing expected inflation for the next 12 and 24 months. Consequently, the Bank of Israel explained that one Consumer Price Index (CPI) has no intrinsic significance (whether positive or negative) other than in its ability to alter expected inflation for the policy horizon, i.e., the next 12 or 24 months. The same applies to short-term fluctuations in exchange rate and inflation expectations. This approach is consistent with the framework of striving for price stability over time, and creates the infrastructure necessary for sustained growth.

The Bank explained that the decision not to change the rate of interest for July is intended to ensure that expected inflation for a one- and two-year horizon, which rose slightly of late, is consistent with the target range of 3 to 4 percent a year. This is because in the first few months of the year inflation expectations and forecasts for one and two years ahead were in an environment below that required to meet the inflation target. This development has enabled the Bank of Israel to lead a process of interest-rate reduction in these months.

The Bank of Israel emphasized that there are dangers to the price stability process that derive inter alia from development on the foreign-currency markets and on money and capital markets. The trend of a rapidly declining interest-rate gap between Israel and abroad, essentially between interest on local currency (which has been reduced) and that on the dollar (which has been rising in the last twelve month), the fall in capital raised by Israeli companies in the US capital market in foreign investment in Israel all affect capital flows and the management of the public's assets and liabilities portfolios. The Bank of Israel again pointed out in this context that the public considers the dollar interest rate as the main substitute for the local-currency interest rate, and this is reflected in the current dollar share in the 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 added that the long-term development of the money supply, medium-term macroeconomic targets set in the framework of the discussions on the budget for 2001 with regard to the continuation of the process of reducing both the budget deficit and inflation, and the signs of recovery in Israel's real economic activity, constitute part of the basis for evaluating whether the current nominal rate of interest is appropriate, also for the future, to the achievement of the inflation target.

Changes in the Interest Rates of the Central Banks of Israel and the US*
ISRAEL
US
Interest level in December 1998 (percent, annual rates)
13.50
4.75
Change in interest rate in 1999 (percentage points)
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 (percentage points)
January
-0.5
0
February
-0.4
0.25
March
-0.4
0.25
April
-0.3
0
May
-0.3
0.5
June
0

July
0
**
Interest level in July 2000 (percent, annual rates)
9.30
6.50

* The comparison of interest rates requires reference also to Israel's country risk, which ranges in the capital market from 1 percent to 1.5 percent.
** The Open Market Committee of the US Federal Reserve is set to convene on June 28 for its regular review of interest-rate policy. The current Federal Reserve interest rate, prior to the review, is 6.5 percent.