The Bank of Israel's Monetary Program for April 2003

24.03.03

The Bank of Israel's Monetary Program for April 2003

The Bank of Israel today announced its monetary program for March 2003, according to which the interest rate will be reduced by 0.2 percentage points, bringing it to 8.7 percent.

The Bank of Israel stated that in the last few weeks inflation expectations for one year, two years, and longer, derived from the capital market, declined, although they are still above the target set by the government. Private forecasters' predictions of 12-month inflation have also dipped and are within the target range. The models developed by the Bank of Israel indicate that it is possible to attain the target of price stability while reducing the interest rate to some extent. In addition, local-currency appreciation and the decline in long-term interest rates appear to indicate that the public expects the policy measures which the Ministry of Finance has put before the government to be introduced. Against the backdrop of the moderate level of economic activity, it is possible for the Bank of Israel to reduce its key interest rate at this stage, but it should be noted that there is still considerable uncertainty in view of the difficulties that might arise in the implementation of budgetary policy, the global slump, the continuation of the Intifada, and the implications of the war in Iraq for the financial markets, economic activity in Israel, and developments in the region.

The Bank of Israel stressed that in recent weeks the yields on unindexed 10-year bonds have declined to less than 11 percent (compared with a peak of almost 12 percent), and the yields on indexed bonds for the same term have fallen to 5.5 percent (compared with a peak of almost 6 percent). This development would seem to express the public's confidence in an improvement in the fiscal situation following the recommendations included in the economic package, alongside a possible abatement of the causes of uncertainty listed above. However, the measures introduced must be consistent with a declining budget deficit path, as decided by the government in 2002, expressed in a reduction in the debt/GDP ratio, so that this improvement becomes permanent. This policy is essential for making credit available, maintaining Israel's international credit rating, continuing with the reduction of long-term interest on government bonds, and hence for reducing the interest rate on credit for investment and mortgages which is vital for reviving growth and stimulating employment. Note, too, that the adoption of reforms with long-term repercussions, as is the case with the reforms of the labor market and pension savings, is necessary in order to create the infrastructure for the renewal of growth once external conditions permit. The Bank of Israel explained that the further reduction of the short-term interest rate while maintaining stability depends to a great extent on the public's confidence in adherence this year and in the medium term to the fiscal restraint which is also required for strengthening the financial system. The Bank of Israel added that a credible blueprint for the development of the infrastructure, while promoting competition in it, is necessary in order to check the contraction of the economy and return to a growth path.

The Bank of Israel will continue to monitor developments in the markets, in order to ensure that the inflation rate defined as price stability is maintained while bolstering financial 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 1998

13.50

4.75

8.80

December 1999

11.20

5.50

5.70

December 2000

8.20

6.50

1.70

December 2001

5.80

1.75

4.05

December 2002

9.10

1.25

7.85

Changes in interest rate (percentage points)

 

2002 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

-0.50

7.85

December

0.0

-

7.85

2003 January

-2.0

-

7.65

February

0.0

-

7.65

March

0.0

-

7.65

April

-0.2

-

 

Interest level (percent, annual rate)

 

2002 April

4.4

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

7.85

December

9.1

1.25
7.85

2003 January

8.9

 1.25
 7.65

February

8.9

 1.25
 7.65

March

8.9

 1.25***
 7.65

April

8.7

   

 

* The rate of interest set in the previous month's monetary program for the month indicated in the table.
** The comparison of interest rates requires reference also to Israel's country risk, which according to international capital markets now ranges from 1.60 percentage points (for half a year) to 2.00 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 May 2003 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

Effectiveb

Realc

2000                  

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
5.8 
8.9 
5.8 
11.5

December

9.1

9.6 
6.7 
7.9 
5.6 
10.9 

2003

 

 
 
 
 
 

January

8.9

9.4 
5.9
 8.1
5.8 
 11.4

February

8.9

9.4 
 4.7
8.7 
5.7 
 11.7

March

8.9

 9.4
5.1 
8.7 
5.5 
10.9 

April

8.7

 
 
 
 
 

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