The Bank of Israel's Monetary program for March 2001


Monetary program for March 2001

26 February 2001


As a result of instructions issued by the Workers' Committee, the following stages in the process of decision-making regarding the rate of interest for March 2001 have not taken place:

1. Data have not been submitted by the four departments involved in the process (the Monetary, Research, Foreign Exchange Control, and Foreign Currency Departments).

2. Departmental discussions headed by managers of the departments to formulate recommendations have not been held.

3. The discussion to assess the monetary situation, a wide forum headed by the Governor held with the participation of the staff who prepared the data and the recommendations, did not take place.

4. The discussions in the Monetary Forum, a narrower forum also headed by the Governor, was held on the basis of incomplete and partially non-updated information. The main items missing were data on economic trends expected in the US and Europe and their implications for the Israeli economy; on possible developments in capital flows from and to Israel, and their effects on the exchange rate; on the forecasts of real changes, growth, and unemployment in Israel; and alternative scenarios of expected inflation based on econometric models of the Research Department and the Monetary Department.

In addition to the above, the instructions of the Workers' Committee have prevented the Bank of Israel from publishing data for the public, such as the money supply and inflation expectations, which are essential for understanding monetary policy; these data have not been supplied to the Bank’s management either.

It is impossible to manage monetary policy in a cloud of uncertainty. The Bank therefore asked the government on 21 February 2001 to introduce emergency regulations so that confinement orders could be issued in limited areas and quantities, to enable, among other things, the existence of the minimum requirements necessary to manage monetary policy. In the absence of such regulations and orders, at this stage, the management of the Bank was faced with the choice of postponing the publication of the rate of interest until such time as a decision could be taken on the basis of all the data and after the due process of discussions had taken place, or accepting a process of improvised decision-making, based on partial and non-updated data.

Given this background, and in the light of the assessment-within the limitations of the available data-that at the current rate of interest, inflation in the next twelve months is expected to be below the target, the Bank of Israel’s interest rate for March will be reduced by 0.2 percentage points, from 7.7 percent to 7.5 percent.

The Bank of Israel stresses that the possibility of implementing the interest-rate decision depends on the non-disruption of the process of holding daily monetary auctions. The management of the Bank cannot assess whether it will be possible to implement and maintain the change in the rate of interest, and how events will develop by the end of the week (when the change should take effect), and thereafter.


Changes in the Interest Rates of the Central Banks of Israel and the US
ISRAEL
US
Differential between NIS and dollar interest rates* (percentage points)
Interest level (precentage annual rates)
December 1998
13.50
4.75
8.75
December 1999
11.20
5.50
5.7
December 2000
8.2
6.5
1.7
Changes 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
7.00
July
0
0
7.00
August
-0.5
0.25
6.25
September
0
0
6.25
October
0
0
6.25
November
0
0.25
6.00
December
-0.3
0
5.70
Changes in interest rate in 2000 (percentage points)
January
-0.5
0
5.20
February
-0.4
0.25
4.55
March
-0.4
0.25
3.90
April
-0.3
0
3.60
May
-0.3
0.5
2.80
June
0
0
2.80
July
0
0
2.80
August
-0.2
0
2.60
September
-0.2
0
2.40
October
-0.3
0
2.10
November
-0.2
0
1.9
December
-0.2
0
1.7
Changes in interest rate in 2001 (percentage points)
January
-0.2
-0.5
2.0
February
-0.3
-0.5
2.2
March
-0.2
Interest level in January 2001 (perecet, annual rate)
January
8.0
6.0
2.0
February
7.7
5.5
2.2
**March
7.5
* The comparison of interest rates requires reference also to Israel’s country risk, which according to international capital markets now ranges from 1.2 percentage point (for half a year) to 2.0 percentage points (for 10 years). Note that the risk premium is characterized by volatility which is sometimes caused by factors related to Israel’s economy, and sometimes by global events. ** The Open Market Committee of the US Federal Reserve is due to convene on March 20 for its regular review of interest-rate policy. The current Federal Reserve rate of interest, prior to the review, is 5.5 percent.