The Bank of Israel's Monetary Program for December 2002

25.11.02

The Bank of Israel's Monetary Program for December 2002

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

In recent weeks there has been a slight decline in inflation expectations as derived from the capital market, but their level for all terms is still above the upper limit of the long-term inflation target set by the government (3 percent). At the same time, private forecasters' predictions and assessments of inflation derived from the models developed by the Bank of Israel are within the range, provided no financial shocks are expected. Nevertheless, the overall picture obtained from the money and bond markets indicates a high level of uncertainty, and it is for caution in implementing monetary policy so as to prevent deviation from price stability and damage to financial stability.

The 2003 budget, which was passed at its first reading in the Knesset, now appears to be based on an estimate of tax receipts and an under-estimation of expenditure, which could be expressed in a larger deficit than planned, and an additional increase in the long-term interest rate. In order to prevent this, a substantial revision of the budget will be necessary once the new government is installed. Investors doubts regarding the extent of fiscal discipline, and uncertainty as to the size of the deficit this and next year, were expressed in capital market yields on Shahar bonds, which returned to a high level of 7.11 percent, after declining to 9.3 percent in July and August.

The Bank of Israel stressed that fiscal discipline and the aspiration to attain a declining budget deficit path and debt/GDP ratio are necessary conditions for the availability of credit, a decline in long-term interest on government bonds, and consequently for the reduction of interest on investments and mortgages, which are important for the renewal of growth and the stimulation of employment. A decline in long-term interest could also enable short-term interest to be reduced without harming stability. Correct fiscal policy will contribute to the country's economic robustness, is essential for strengthening its financial system, and will enable the creation of a sound basis for the renewal of growth, once external conditions allow.

The Bank of Israel added that despite the local-currency appreciation evident since June, there is still 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 (a standard deviation of 8 percent, after 4 percent in 2001). There is also a continued rise in the risk premium ascribed to Israel by international markets, as expressed in the spread on government bonds traded abroad (compared with the interest rate paid by the US government). This spread for a ten-year horizon has risen to 2.5 percentage points, from 1.7 percentage points in July. As is the case in Israel, the rate of interest on government bonds abroad serves as a benchmark for private capital raising, and its rise affects the cost of borrowing for the private sector abroad.

The Bank of Israel will continue to monitor developments in the market, in order to bolster financial stability and ensure that the actual inflation rate returns 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

December

0.0

-0.50

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

1.25 **

7.35

December

9.1

   

 

*  The comparison of interest rates requires reference also to Israel's country risk, which according to international capital markets now ranges from 2.10 percentage points (for half a year) to 2.50 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 10 November 2002 for its regular review of interest-rate policy. The current Federal Reserve rate of interest, prior to the review, is 1.25 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

9.7
5.5 
9.3 
5.8 
11.7 

November

9.1

9.6
5.7 
9.1 
5.8 
11.7 

December

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.