The Bank of Israel's Monetary program for October 2000


September 25, 2000

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

The Bank of Israel notes that the decision to lower the nominal interest rate for October by this amount is consistent with the inflation target set by the government for the next few years, and thus also supports the attainment of the government’s other targets without endangering the achievement of the inflation target. The government decided that interest policy should focus on attaining the inflation target of 2.5 to 3.5 percent for 2001, 2 to 3 percent for 2002, and 1 to 3 percent-a range which is defined as price stability-from 2003 onwards. Setting an inflation target with such a time scale, which reflects a commitment to maintaining long-term price stability, helps interest-rate policy achieve its objective to bring inflation into the range defined as price stability and maintaining it at that level while minimizing fluctuations in the rate of interest on the one hand, and on the other to sustain and provide a firm basis for the current export-led economic growth which depends to a large extent on conditions of economic stability. The Bank of Israel stresses that the interest rate cannot also be used as an instrument with which to achieve other goals such as ensuring a specific path or particular level for the exchange rate, unless they happen to derive from the inflation target determined by the government. The Bank again states that fluctuations in the exchange rate may sometimes be significant due to external factors, and this must be borne in mind by policy makers and by market players.

The Bank of Israel notes again that the assessment of the inflation path for one and more years ahead-currently between 2 and 3 percent a year-is based as always on the Bank’s forecasts of inflation, on inflation expectations derived from the capital market, and on the predictions of various private forecasters. In this context, it is estimates of inflation for the next 12 months and beyond that are significant, and not any single Consumer Price Index, whether it happens to be relatively high or low, nor estimates for any period shorter than one year (for instance for the four months till the end of the year 2000). Similarly, short-term fluctuations in the exchange rate or in inflation expectations also hold no significance, unless they incorporate elements that may alter the assessments of inflation within the policy horizon-the following 12 months and beyond. The Bank adds that changes in the money supply over time, the development of real economic activity with a relatively rapid rise in wages, and fiscal developments, all these also form part of the basis for assessing current and future interest-rate policy which is aimed at achieving the inflation target.

The Bank of Israel notes once again that the process of price stabilization is still facing dangers which arise inter alia from the fluctuations in fuel prices and the reduction in the interest-rate differentials between Israel and overseas taking into account the risk premium which international capital markets attribute to Israel’s economy (currently estimated at between 0.8 percentage points for the short term and 1.9 percentage points for the long term). The contraction of interest-rate differentials has implications for capital flows and the management of the public’s assets and liabilities portfolios, and thus for Israel’s financial markets. The Bank of Israel again points out in this context that the dollar interest rate is the main substitute for the local-currency interest rate, because of the present currency composition of the public’s foreign-currency assets and liabilities and of capital flows to and from Israel.


Changes in the Interest Rates of the Central Banks of Israel 
and the US*
 
ISRAEL
US
Gap between
NIS and dollar
interest
Interest level in December 1998 (percent, annual rates)      
 
13.50
4.75
8.75
Change in interest rate in 1999 (percentage points)      
January
0
0
8.75
February
0
0
8.75
March
-0.5
0
8.25
April
-0.5
0
7.75
May
-0.5
0
7.25
June
0
0.25
7
July
0
0
7
August
-0.5
0.25
6.25
September
0
0
6.25
October
0
0
6.25
November
0
0.25
6
December
-0.3
0
5.7
Change in interest rate in 2000 (percentage points)      
January
-0.5
0
5.2
February
-0.4
0.25
4.55
March
-0.4
0.25
3.9
April
-0.3
0
3.6
May
-0.3
0.5
2.8
June
0
0
2.8
July
0
0
2.8
August
-0.2
0
2.6
September
-0.2
2.4
October
-0.3
**
2.1
Interest level in October 2000 (percent, annual rates)      
 
8.6
6.50
2.1

* The comparison of interest rates requires reference also to Israel’s country risk, which according to international capital markets now ranges from 0.8 to 1.9 percentage points.
** The Open Market Committee of the US Federal Reserve is set to convene on October 3 for its regular review of interest-rate policy. The current Federal Reserve interest rate, prior to the review, is 6.5 percent.