The Bank of Israel's Monetary Program for September 2002

26.08.02

The Bank of Israel's Monetary Program for September 2002

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

The Bank of Israel explains that in the wake of the 2 percentage-point increase in the interest rate at the end of June, there has been local-currency appreciation and a decline in yields on unindexed government bonds, while the financial markets have been calmer. Inflation expectations for the next two years, as derived from the capital market, private forecasters' predictions, and the models developed by the Bank of Israel, have declined, converging to the long-term inflation target range set by the government (1-3 percent). Nevertheless, inflation expectations for longer terms are still above the target.

The Bank of Israel stresses that it is necessary to base price stability on the actual inflation data of the next few months, and not solely on the decline in inflation expectations. This is because neither the moderation of economic activity nor the deepening of unemployment have prevented inflation from rising to date (a cumulative 7 percent increase since the beginning of the year). In addition, forces are still at work that threaten both financial and price stability.

These factors include the uncertainty that still prevails regarding the approval of the 2003 budget, and continued concern about the security situation. As far as the budget is concerned, the Bank of Israel stresses that a genuine return to fiscal discipline, as expressed in the commitment to a path of a declining budget deficit/GDP ratio, and a declining deficit over time, is essential in order to bring about a reduction in the long-term interest rate—which affects the government's debt-servicing payments as well as the extent of investment and mortgage interest—and in order to enable the Bank of Israel to reduce short-term interest without harming stability.

Note that in the last few months interest on indexed long-term bonds (10 years) has not fallen but has risen slightly, to 5.5 percent. Thus, a change is needed in the public's assessment of the government's commitment to budget discipline in order to attain the reduction of both long- and short-term interest that should help to revive growth and reduce unemployment.

Although the foreign-currency market has been calmer in the last two months, and there has been cumulative local-currency appreciation of 6 percent, the effect of the calm has not been evident in prices. In addition, the implied volatility of the NIS/dollar options issued by the Bank of Israel, which serves as an indication of exchange-rate risk, has fallen slightly, although remaining significantly higher than its level in 2001. Moreover, the expected trends of long-term capital flows and the current account in the balance of payments do not support the continuation of appreciation, but the contrary. This is because the persistence of the slump in the developed countries in general, and the US in particular, as well as the sluggish capital markets there, reduce the possibility of the renewal of raising capital abroad.

The Bank of Israel points out that it will continue to monitor developments on an ongoing basis, taking the steps required to bolster financial stability and restore the actual inflation rate to the sphere defined as price stability. Subject to these conditions, the Bank will act to support the government's policy to foster employment and shorten the recession.

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

September

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

1.75

7.35

September

9.1

1.75**

7.35

 

*  The comparison of interest rates requires reference also to Israel's country risk, which according to international capital markets now ranges from 1.80 percentage points (for half a year) to 1.70 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 24 September 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
7.6
8.9
5.5
9.4

September

9.1

 
 
 
 
 

* 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.