Adjusment of the Monetary program for June 2001

18 Jun 2001

Adjusment of the Monetary program for June 2001

The Bank of Israel announces a further reduction of 0.2 percentage points in the rate of interest for June 2001 to 6.8 percent, giving a total reduction for the month of 0.4 percentage points. As is generally known, the current decision regarding the interest rate was taken following the ending of employee sanctions in the Bank of Israel and the full return to normal working, which enabled a return to discussions of interest-rate policy for the current month, in line with the undertaking given. Next Monday, 25 June, the Bank of Israel will publish its interest-rate decision for July, thus reverting to the decision-making format which had prevailed previously. The Bank of Israel explains that estimates of inflation for the next few years obtained from inflation expectations in the capital market, private forecasters’ assessments, and inflation estimates based on macroeconomic models developed in the Bank of Israel are below the target range for 2001, and within the target range for periods of more than one year, so that the reduction is consistent with the achievement of the target for the next few years. The Bank of Israel goes on to emphasize that changes in the rate of interest determined according to the inflation target, and the exchange-rate regime do not provide the means for offsetting the dampening effects on Israel’s economy of factors such as the slowdown in the US and the security situation in Israel, nor for solving the structural problems of specific industries and development areas. These difficulties can only be tackled by changing the composition of government expenditure so that it supports growth and focuses on specific areas and issues, while maintaining the downward path of the budget deficit till 2003 in accordance with the government decision of August 2000. This fiscal policy must be reinforced by structural reforms-the pace of which has recently slowed significantly-also in the social sphere, and by greater transparency, including the submission of a report to the government and the public on the estimated deficit for 2001, using the internationally accepted definitions. The Bank of Israel points out the importance of continued maintenance of the stability which has been achieved in the financial markets as a result of monetary policy among other things. In this context the Bank of Israel draws attention to the need to change the exchange-rate regime, which was created under circumstances no longer applicable and which harbors the potential to cause a financial crisis of inestimable magnitude and could lead to the Bank of Israel’s superfluous and distorting intervention in the markets.
Changes in the Interest

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 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
-0.5
2.5
April
-0.3
-0.5
2.7
May
0.0
-0.5
3.2
June
-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
5.0
2.5
April
7.2
4.5
2.7
May
7.2
4.0
3.2
June**
6.8
4.0**
2.8

* The comparison of interest rates requires reference also to Israel’s country risk, which according to international capital markets now ranges from 0.8 percentage point (for half a year) to 1.5 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 set to convene
on June 27 for its regular review of interest-rate policy. The current Federal Reserve rate of interest, prior to the review, is 4.0 percent.