The Bank of Israel's Monetary Program for November 2002

28.10.02

The Bank of Israel's Monetary Program for November 2002

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

In the last few weeks expectations of inflation for the year ahead as derived from the capital market have risen, and are in excess of the upper limit of the long-term inflation target set by the government; private forecasters' predictions, however, although they rose slightly, are still within the target range. Assessments of inflation derived from the models developed by the Bank of Israel are not unequivocal. In addition, the great uncertainty in the foreign-currency and bond markets indicates the need to follow developments closely so that action can be taken to prevent a deviation from price stability and damage to financial stability.

In the light of uncertainty regarding the approval of the budget for 2003, there has been a continuous rise in the nominal and real yields in the government bond market in the last few weeks: yields on Shahar bonds rose to 11.5 percent, compared with 9.3 percent in July, and the real interest on government bonds rose to 5.8 percent from 5.4 percent in July. These movement express investors' doubts as to the government's commitment to maintaining fiscal discipline. The government's domestic debt was downgraded by one of the international rating agencies, another expression of concern regarding the government's commitment to fiscal discipline in the light of the upward trend in the share in GDP of the government debt. Fiscal discipline is a sine qua non for the reduction of interest on long-term government bonds which affects the government's budget for interest expenses, the extent of investment, and the rate of long-term interest, including mortgage interest. The reduction in long-term interest is a condition for the future reduction in short-term rates of interest without jeopardizing stability, and is a key for future economic growth and the creation of jobs. Such a policy will help make the economy more robust, is vital to the strengthening of the financial system, and will enable the creation of a firm basis for renewed economic growth when external conditions become more favorable.

Despite the local-currency appreciation 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 in the domestic market, as well as in the continued rise in the risk premium ascribed to Israel by international markets, as expressed in the spread on government bonds traded abroad. This spread for a ten-year horizon has risen to 2.2 percentage points, from 1.7 percentage points in July. The rate of interest on government bonds abroad serves as a benchmark for private capital raising, and its rise affects the cost of credit abroad facing the private sector.

The Bank of Israel 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

November

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

1.75 **

7.35

November

9.1

   

 

*  The comparison of interest rates requires reference also to Israel's country risk, which according to international capital markets now ranges from 1.7 percentage points (for half a year) to 2.2 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, 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 6 November 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
9-10-year bonds d

Effective b

Real c

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
9.3

September

9.1

9.6
6.5
8.9
5.7
10.4

October

9.1

9.6
5.4 
9.2 
5.8 
11.4 

November

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.
d Up to June 2002 the yield on 10-year auctions. From July the average daily market yield.