The Bank of Israel's Monetary Program for October 2002

23.09.02

 

The Bank of Israel's Monetary Program for October 2002

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

The Bank of Israel explains that assessments of inflation for the year ahead, as derived from the capital market, private forecasters' predictions, and the models developed by the Bank of Israel, are within the long-term inflation target range determined by the government, although factors exist which imperil financial and price stability.

These factors include the uncertainty that still prevails regarding the approval of the budget, continued concern about the security situation in Israel and the Middle East, and the considerable volatility in the foreign-currency market. With regard to the budget, there is a great deal of uncertainty as to whether the deficit target set for 2002 will be attained in view of the ongoing decline in tax receipts and both the approval and implementation of the 2003 budget.

The uncertainty pertaining to the budget and the government's borrowing requirements are currently reflected in the market for government bonds, whose nominal and real yields have risen in the last few months (yields on Shahar bonds reverted to 10 percent, after having been 9.3 percent in July), expressing investors' misgivings as to the government's commitment to fiscal discipline. A return to fiscal restraint, expressed in a downward debt/GDP path and declining long-term deficit path, is essential in order to bring about the reduction of long-term interest which will affect the government's debt-servicing costs, the extent of investment, and mortgage interest. It will also enable the reduction of short-term interest without jeopardizing stability, as a key element to economic growth and the creation of new jobs.

The Bank of Israel notes that even after the local-currency apreciation evident since June, there is extensive uncertainty in the foreign-currency market. This is expressed in the relatively high volatility implicit in the NIS/$ options issued by the Bank of Israel, reflecting exchange-rate risk, as well as in the rise in the risk premium ascribed to Israel by international markets, as expressed in the spread on government bonds traded abroad. In addition, the expected trend of long-term capital flows and the current account of the balance-of-payments do not support the strengthening of the shekel but indicate the opposite. This is due to the continued recession in the advanced economies, and the US in particular, and the slump in the capital markets there, reducing the possibility of raising capital abroad once more. As a result, the trend of exchange-rate shifts is influenced to a greater extent today than in the past by short-term capital flows, which are sensitive to interest-rate spreads between Israel and abroad.

Last week one of the rating agencies reduced the rating of Israel's three largest banks, justifying this by the uncertainty in Israel's economic environment and banking sector, as well as the slump in the US and the high-tech sector. The Bank of Israel reiterates that it is crucial to adhere to a cautious macroeconomic policy, and budget policy in particular, guided by long-term considerations of economic stability. This serves to bolster the economy, is essential for reinforcing the financial system, and enables the creation of a sound basis for renewed growth once external conditions permit.

The Bank of Israel points out that it will continue to monitor developments in the market, in order 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 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

October

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

October

9.1

   

 

*  The comparison of interest rates requires reference also to Israel's country risk, which according to international capital markets now ranges from 1.4 percentage points (for half a year) to 1.9 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                  

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
6.7
9.0
5.4
9.3

August

9.1

9.6
7.5
8.8
5.5
9.4

September

9.1

9.6
7.3
8.7
5.6
9.9

October

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.