The Bank of Israel's Monetary Program for July 2004


The Bank of Israel’s Monetary Program for July 2004

The Bank of Israel today announced that in the context of its monetary program for July 2004, 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.

The decision to leave the interest rate unchanged for the third month in succession is based on the expectation that inflation one and two years forward will follow a path consistent with that of price stability, i.e., 1-3 percent a year. Inflation expectations derived from the capital market and the predictions of private forecasters for the next twelve months are around 2 percent.

In addition, developments in the capital market, and in particular in the government bond market and the foreign-currency market, give strong support to the decision not to change the interest rate for July. In the government bond market the upward trend in yields evident since the beginning of the year has halted, and since the beginning of June they have actually declined slightly. This change, which can be explained by the increasing likelihood that the government will meet its deficit target of 4 percent of GDP in 2004 and by surplus borrowing by the government in the first half of the year, also led to a halt in the widening of the differential between the yield on government bonds and the Bank of Israel\'s interest rate. This widening differential is inconsistent in the long term with price stability. The foreign-currency market is calm, with the main developments being a certain strengthening of the NIS and, recently, relatively moderate fluctuations, chiefly connected with external factors; no clear market trend is evident, despite the latest occurrences in the political arena.

The decision not to change the interest rate for July means that short-term real interest continues at a very low level of about 2.2 percent,. This policy is intended to continue supporting economic recovery, as long as the Bank of Israel assesses that this is consistent with price stability, which is one of the conditions necessary for the creation of sustained growth.

It is important that the government continue to maintain the credibility of its macroeconomic policy that focuses on the long-term budget targets that it set, that it persist in carrying out structural reforms such as those in the labor market, public services, the Ports Authority and the financial markets, and that it ensure that the infrastructure investment program is executed at a faster pace. The right decisions in the discussions on the budget for 2005 that are scheduled to start in July will play a significant role in the assessment of whether the economys current growth is sustainable.

The differentials between the Bank of Israels interest rate, both current and expected, and those of other central banks continue to contract, and the Bank of Israels interest rate is still lower than that of the central banks of some advanced economies (the UK, Australia and New Zealand). This trend supports short-term capital outflow from Israel, and the balance in the foreign-currency market is maintained at present by long-term capital inflow accompanying economic growth.




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


The risk premium, as measured by the 5-year credit-default-swap (CDS) market down to about 60 basis points, from about 70 basis points a month earlier.


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


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.




Including two increases in the interest rate in the month. The Bank of Israels effective and real interest rates are calculated on the basis of monthly averages.


Announced interest rate in simple annual terms (excluding compound interest).


Calculated as the daily compound interest rate, based on the interbank rate (see explanation in BOI no. 2, p. 17).


The real rate of interest is the effective rate of interest less inflation expectations derived from the capital market.


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