The Bank of Israel's Monetary Program for August 2002

29.07.02

 

The Bank of Israel's Monetary Program for August 2002

The Bank of Israel today announced its monetary program for July 2002, according to which its interest rate will remain unchanged at 9.1 percent.

The Bank of Israel explains that in the wake of the 2 percentage-point increase of last month, there was some local-currency appreciation, a decline in yields on unindexed government bonds, and the financial markets calmed. Inflation expectations for the next few years, as derived from the capital market, private forecasters’ predictions, and the models developed by the Bank of Israel, have declined, converging to the upper limit of the long-term inflation target range set by the government (1-3 percent).

The Bank of Israel stresses, however, that it is necessary to entrench the public’s perception that prices are stabilizing on the basis of the actual data of the next few months, not solely with reference to the decline in inflation expectations. This is because neither the moderation of economic activity nor the deepening of unemployment prevented inflation from rising in the first half of the year. In addition, forces are still at work that threaten financial stability in general, and price stability in particular.

Prominent recently among the latter have been the negative trend of global financial markets, especially in the US, further reducing the ability to raise capital abroad, as well as the persistence of security uncertainty, affecting access to foreign-currency sources abroad and the level of real economic activity.

The Bank of Israel notes with concern the exceptional expansion of the narrow money supply (M1), which grew by 22 percent in the last 12 months—far more than is warranted by an inflation environment of price stability and the forecast growth rates. This increase reflects the tendency of the public in recent months to invest in short-term assets, expressing a rise in economic and financial uncertainty. It is necessary, in addition, to examine the implications of the recent changes in the tax regulations for both the composition of the public’s financial assets and the financial markets.

Under these circumstances, the need to adopt a budgetary policy that will signal a return to the fiscal restraint that indicates commitment to a declining government deficit/GDP path, and hence to the reduction of the deficit over time. This will preserve financial stability as well as bringing about the reduction of the long-term interest rate—the rate that is relevant for investments and mortgages. This process of reducing the budget deficit will enable the Bank of Israel to lower the short-term interest rate, thereby helping to revive growth and reduce unemployment while maintaining price stability.

In view of these developments, the Bank of Israel points out that it is too early to say whether the threats to financial and price stability have been averted. The Bank of Israel reviews developments on an ongoing basis and will take the steps required by the situation.

Changes in NIS and dollar interest rates

 

 

 

ISRAEL

 

US

Differential between NIS and dollar interest rates*

(percentage points)

Interest level (percent, annual rate)

 

December 2000

8.20

6.50

1.70

December 2001

5.80

1.75

4.05

Changes in interest rate percentage points)

 

2001      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

-0.4

-

2.8

July

-0.3

-0.25

2.75

August

-0.2

-0.25

2.80

September

0.0

-0.50

3.30

October

0.0

-0.50

3.80

November

-0.2

-0.50

4.10

December

-0.3

-0.25

4.05

2002      January

-2.0

-

2.05

February

0.0

-

2.05

March

0.6

-

2.65

April

0.0

-

2.65

May

0.2

-

2.85

June

2.5

-

5.35

July

2.0

-

7.35

August

0.0

-

7.35

Interest level (percent, annual rate)

 

2001      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

July

6.5

3.75

2.75

August

6.3

3.5

2.80

September

6.3

3.0

3.30

October

6.3

2.5

3.80

November

6.1

2.0

4.10

December

5.8

1.75

4.05

2002      January

3.8

1.75

2.05

February

3.8

1.75

2.05

March

4.4

1.75

2.65

April

0.0

1.75

2.65

May

4.6

1.75

2.85

June

7.1

1.75

5.35

July

9.1

1.75**

7.35

August

9.1

 

 

 

*  The comparison of interest rates requires reference also to Israel’s country risk, which according to international capital markets now ranges from 1.10 percentage points (for half a year) to 1.50 percentage points (for 10 years). Note that the risk premium is characterized by volatility which caused by factors related to Israel’s economy, by developments in financial markets abroad and by changes in the degree of tradability in those markets.
** The Open Market Committee of the US Federal Reserve is due to convene on 26 June 2002 for its regular review of interest-rate policy. The current Federal Reserve rate of interest, prior to the review, is 1.75 percent.

 

The Bank of Israel Real Rate of Interest, the Yield on Treasury Bills, and the Real Yield on CPI-Indexed Government Bonds

(monthly average, percent)

    

Headline rate (simple)a

Bank of Israel rate of interest

Yield on 12-month Treasury bills

Real yield to redemption on CPI-indexed 10-year bonds

Yield on Shahar unindexed fixed-rate 10-year bonds

Effectiveb

Realc

2000                  

April

9.6

10.1

7.0

8.8

5.1

-

May

9.3

9.9

6.0

9.1

5.1

-

June

9.3

9.9

6.1

9.3

5.2

-

July

9.3

9.8

7.1

9.0

5.4

-

August

9.1

9.6

7.3

8.8

5.6

-

September

8.9

9.4

6.9

8.7

5.7

-

October

8.6

9.1

6.9

8.6

5.6

-

November

8.4

8.9

7.0

8.4

5.6

-

December

8.2

8.6

7.8

7.8

5.8

-

2001                  

 January

8.0

8.4

7.0

7.6

5.6

-

February

7.7

8.1

6.0

7.3

5.3

-

March

7.5

7.9

5.8

7.1

5.1

-

April

7.2

7.6

6.2

6.8

5.0

-

May

7.2

7.6

6.3

6.6

4.7

6.6

June

6.8

7.3

5.5

6.4

4.3

6.5

July

6.5

6.8

4.6

6.2

4.4

6.8

August

6.3

6.6

3.6

6.4

4.5

7.4

September

6.3

6.6

2.9

6.7

4.6

8.1

October

6.3

6.6

4.1

6.3

4.7

7.3

November

6.1

6.4

5.0

5.8

4.7

6.9

December

5.8

5.6

4.0

5.0

4.3

6.7

2002                  

 January

3.8

4.0

1.2

4.3

3.7

6.6

February

3.8

4.0

0.8

4.7

3.9

6.7

March

4.4

4.6

2.2

5.3

4.4

6.9

April

4.4

4.6

1.3

6.0

4.9

7.6

May

4.6

4.9

0.4

6.7

5.2

9.2

June

7.1

7.3*

*2.2

8.7

5.3

11.8

July

9.1

9.7
6.4
9.0
5.4
9.3

August

9.1

9.7

* Including two increases in the interest rate in the month. The Bank of Israel's effective and real interest rates are calculated on the basis of monthly averages.
a Announced interest rate in simple annual terms (excluding compound interest).
b Calculated as the daily compound interest rate, based on the interbank rate (see explanation in BOI no. 6).
c The real rate of interest is the effective rate of interest less inflation expectations derived from the capital market.