The Bank of Israel's Monetary Program for June 2004

24.05.04

The Bank of Israel’s Monetary Program for June 2004

The Bank of Israel today announced its monetary program for June 2004, according to which the interest rate will be unchanged at 4.1 percent. From the end of 2002 to April 2004 the interest rate was cut by a cumulative 5 percentage points, and this is the second consecutive month in which the rate is being kept unchanged.

The relatively steep rise in prices reflected by the latest published CPI and that expected for the current month, based on forecasts of various experts, drive home the point that despite price stability in Israel since 1999, the monthly volatility of the CPI is much higher than in other countries that enjoy price stability. This situation, against the background of the relatively rapid recovery of economic activity, introduces an element of uncertainty about the path of inflation in the future, and makes the closest monitoring essential to ensure that it remains consistent with the long-term price-stability range of 1-3 percent a year. The decision not to change the interest rate for June means the continued reduction in short-term real interest to a new low of about 2.4 percent, because of the rise in inflation expectations. This policy is aimed at supporting continued economic recovery, as long as the Bank of Israel assesses that this does not conflict with price stability, which is one of the conditions necessary for the creation of sustained growth.

Three important developments played a part in the Banks decision not to change the interest rate.

First, assessments of inflation for one year forward derived from the capital market and from private forecasters forecasts remain consistent with the target range of price stability.

Second, fiscal policy continues to observe fiscal discipline that increases the likelihood that the government will adhere to the 2003 deficit target of 4 percent of GDP, and that conditions will be created that will enable the government to cut the deficit to 3 percent of GDP in 2005 in accordance with its decision. These are the conditions necessary both to halt the upward trend of yields on government bonds that started at the beginning of the year and to boost investment in the economy.

Third, the foreign-currency market continues to feature regular activity by buyers and sellers. On one side there is long-term capital inflow, deriving from economic growth, and on the other, an outflow of short-term capital resulting from a contraction of interest-rate differentials. These capital flows led to some excess demand for foreign currency that has weakened the NIS since the beginning of the year by about 5 percent against the dollar and by 4 percent against the currency basket. Ongoing economic recovery, particularly if based on the high-tech industries, will probably lead to increased long-term capital inflow during the year.

The Bank of Israel s interest rate is still lower than that of the central banks of some advanced economies (the UK, Australia and New Zealand) and similar to the average rate of the central banks of the advanced and emerging countries.

Table 1: Interest Rates in Israel and the US

 

Central banks interest rates

Yield spread between US and Israel 10-year govt. bondsc

 

Israel

US

Differential between central banks interest ratesb

 

 

End of year

 

 

Change

 

Interest ratea

 

 

Change

 

Interest rate

1998

 

13.5

 

4.75

8.75

-

1999

 

11.2

 

5.50

5.70

-

2000

 

8.2

 

6.50

1.70

-

2001

 

5.8

 

1.75

4.05

1.6

2002

 

9.1

 

1.25

7.85

6.8

2003

 

5.2

 

1.00

4.20

3.0

Monthly data

 

 

 

 

 

 

2002 December

0.0

9.1

-

1.25

7.85

6.8

2003 January

-0.2

8.9

-

1.25

7.65

7.5

February

0.0

8.9

-

1.25

7.65

7.9

March

0.0

8.9

-

1.25

7.65

7.0

April

-0.2

8.7

-

1.25

7.45

5.6

May

-0.3

8.4

-

1.25

7.15

5.0

June

-0.4

8.0

-

1.25

6.75

4.7

July

-0.4

7.5

-0.25

1.00

6.50

4.1

August

-0.5

7.0

-

1.00

6.00

4.3

September

-0.5

6.5

-

1.00

5.50

4.0

October

-0.4

6.1

-

1.00

5.10

3.6

November

-0.5

5.6

-

1.00

4.60

3.3

December

-0.4

5.2

-

1.00

4.20

3.0

2004 January

-0.4

4.8

-

1.00

3.80

3.1

February

-0.3

4.5

 

1.00

3.50

3.5

March

-0.2

4.3

 

1.00

3.30

3.8

April

-0.2

4.1

 

1.00

3.10

3.6

May

0.0

4.1

 

1.00

3.10

3.2

June

0.0

4.1

 

1.00d

3.10

 

a

 The rate of interest set in the previous months monetary program for the month indicated in the table.

b

The risk premium, as measured by the 5-year credit-default-swap (CDS) market went up to 70 basis points, from about 56 basis points a month earlier.

c

The yield spread between 10-year Shahar bonds and 10-year US government bonds.

d

The Open Market Committee of the US Federal Reserve is due to convene on 30 June 2004 for its regular review of interest-rate policy.

 

Table 2: The Bank of Israel Real Rate of Interest, the Yield on Treasury Bills and on Shahar Bonds, 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 bondsd

 

 

Effectiveb

 

 

Realc

2002     January

3.8

4.0

1.7

4.3

3.8

6.6

February

3.8

4.0

0.9

4.7

4.0

6.7

March

4.4

4.6

2.5

5.3

4.5

6.9

April

4.4

4.6

2.1

6.0

5.0

7.6

May

4.6

4.9

1.5

6.7

5.3

9.2

June

7.1

7.3*

2.7*

8.7

5.4

11.8

July

9.1

9.7

7.0

9.0

5.4

9.3

August

9.1

9.6

7.8

8.8

5.5

9.3

September

9.1

9.6

7.1

8.9

5.7

10.4

October

9.1

9.7

6.4

9.3

5.8

11.7

November

9.1

9.6

6.6

8.9

5.8

11.5

December

9.1

9.6

7.2

7.9

5.7

10.9

2003     January

8.9

9.4

6.5

8.1

5.9

11.4

February

8.9

9.4

5.4

8.7

5.8

11.7

March

8.9

9.4

6.1

8.6

5.6

10.7

April

8.7

9.2

7.2

8.2

5.4

9.5

May

8.4

8.8

7.4

7.6

5.0

8.5

June

8.0

8.4

6.8

7.1

4.6

8.0

July

7.5

7.9

5.4

6.7

4.4

8.0

August

7.0

7.4

5.4

6.6

4.7

8.6

September

6.5

6.7

5.2

6.2

4.6

8.3

October

6.1

6.4

4.7

5.8

4.4

7.6

November

5.6

5.8

4.7

5.4

4.2

7.3

December

5.2

5.4

4.6

4.9

4.1

7.0

2004     January

4.8

5.0

3.8

4.7

4.0

7.0

February

4.5

4.7

3.2

4.9

4.1

7.4

March

4.3

4.5

3.3

4.9

4.2

7.4

April

4.1

4.3

2.8

4.8

4.3

7.6

May

4.1

4.3

2.4

5.2

4.4

7.9

June

4.1

 

 

 

 

 

*

Including two increases in the interest rat in the month. The Bank of Israels effective and real interest rates arecalculated 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. 2, p. 17).

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.


Table 3: Central-Bank Interest Rates in Several Countries, May 2004

Advanced countries

Interest rate (percent)

Japan

0.00

Switzerland

0.30

US

1.00

ECB

2.00

Denmark

2.20

Norway

1.75

Canada

2.00

Sweden

2.00

UK

4.25

New Zealand

5.50

Australia

5.25

 

 

Emerging markets

 

Thailand

1.30

Taiwan

1.40

Chile

1.75

Korea

3.80

Israel

4.10

Mexico

6.00

South Africa

8.00

Brazil

16.00

Turkey

22.00

 

 

Other developing countries

 

Czech Republic

2.00

Poland

5.30

Hungary

11.50