The Bank of Israel's Monetary Program for September 2004

23.08.04

The Bank of Israel’s Monetary Program for MONTH September 2004

The Bank of Israel today announced its monetary program for September 2004, according to which the Bank's interest rate will remain at the level of 4.1 percent, following cumulative reductions of 5 percent between the end of 2002 and April 2004.

The Bank explains that its decision not to change the rate, for the fifth consecutive month, is based on the fact that assessments concerning the development of inflation for a period of one to two years ahead, from market-derived inflation expectations and various forecasts of private forecasters, are consistent with the inflation target, 1% to 3% per year. This is in spite of some increase in these measures during the past month. Continued stability and calm in the financial markets, along with approval by the Government of its budget for 2005 in a manner that confirms its fiscal strategy as determined last year, and continued recovery in real economic activity, are the background for the decision not to change the interest rate for September.

Concerning the continued stability in the financial markets, most noteworthy are the foreign exchange market, the bond market and the Treasury bill market. Thus, continued calm in the foreign exchange market is expressed in relatively low trading volumes and heterogeneous activity in the market, i.e., the presence of demands and supplies on the basis of varied needs and expectations , that largely offset each other. As a result, capital outflows and inflows are balanced and the exchange rate continues to develop without large swings or a trend, with trading spreads that remain low. The behavior of the foreign exchange market is especially notable in light of the contraction in the interest rate differential between the Shekel and the Dollar, and the increase in the (negative) differential between the Shekel and the Pound Sterling. In the government bond market, both non-linked (“Shachar”) and index linked (“Galil”) yields have been relatively stable for the past four months, after trending higher during the first four months of the year. Yields on short term bills (“makam”) reflect the market’s view - similar to that of private forecasters - that an increase in Shekel interest rates expected by them will be later than was

expected by them in recent months.

The commitment of the government to the fiscal strategy adopted last year has been expressed in its passing of the 2005 budget which is based on a fiscal program through the end of the decade- a budget deficit which does not exceed three percent of GDP and an increase in government expenditures of no more than one percent in real terms annually. This constitutes a necessary basis for continued economic activity and putting the Israeli economy on a path of sustainable growth in the future. The same is true of having actual budgetary performance in 2004 meeting the budget planned. It is important that the 2005 budget which is passed by the Knesset be consistent with the fiscal strategy of the government. Continuation of this policy will eventually lead to a reduction in the weight of the government debt relative to GDP and lower long term interest rates, and will contribute towards keeping short term interest rates low. This will lay the foundations for private sector led growth and continued financial stability.

The recovery in real economic activity continues, including a reduction in government expenditures relative to GDP and expansion of the business sector, by 5 percent in the last four quarters. The Bank of Israel emphasizes that continued growth is dependent on positive developments in private sector investment. This, in turn is dependent on macro-economic policies - fiscal and monetary -which make resources available for private sector activities and support low short and long term real interest rates.

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

-2.3

11.2

0.75

5.50

5.70

-3.05

2000

-3.0

8.2

1.00

6.50

1.70

-4.0

2001

-2.4

5.8

-4.75

1.75

4.05

1.6

2002

3.3

9.1

-0.50

1.25

7.85

6.8

2003

-3.9

5.2

-0.25

1.00

4.20

3.0

Monthly data

 

 

 

 

 

 

2002 December

0.0

9.1

0.0

1.25

7.85

6.8

2003 January

-0.2

8.9

0.0

1.25

7.65

7.5

February

0.0

8.9

0.0

1.25

7.65

7.9

March

0.0

8.9

0.0

1.25

7.65

7.0

April

-0.2

8.7

0.0

1.25

7.45

5.6

May

-0.3

8.4

0.0

1.25

7.15

5.0

June

-0.4

8.0

0.0

1.25

6.75

4.7

July

-0.4

7.5

-0.25

1.00

6.50

4.1

August

-0.5

7.0

0.0

1.00

6.00

4.3

September

-0.5

6.5

0.0

1.00

5.50

4.0

October

-0.4

6.1

0.0

1.00

5.10

3.6

November

-0.5

5.6

0.0

1.00

4.60

3.3

December

-0.4

5.2

0.0

1.00

4.20

3.0

2004 January

-0.4

4.8

0.0

1.00

3.80

3.1

February

-0.3

4.5

0.0

1.00

3.50

3.5

March

-0.2

4.3

0.0

1.00

3.30

3.8

April

-0.2

4.1

0.0

1.00

3.10

3.6

May

0.0

4.1

0.0

1.00

3.10

3.2

June

0.0

4.1

0.0

1.00

3.10

3.0

July

0.0

4.1

0.25

1.25

2.85

3.2

August

0.0

4.1

0.25

1.50 d

2.6

3.7

September

0.0

4.1

 

 

 

 

 

a

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

b 

The risk premium, as measured by the 5-year credit-default-swap (CDS) market, remained similar to its level a month earlier, at about 60 basis points,.

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 10 August 2004 for its regular review of interest-rate policy.

 

Table 2: The Bank of Israel Real Rate of Interest, the Nominal Yield on Treasury Bills and on Unindexed Government Bonds, and the Real Yield on CPI-Indexed Government Bonds

(monthly average, percent)

 

 

Bank of Israel rate of Interest

Yield on 12 month Treasury bills

Real yield on CPI- indexed 10- year bonds

Yield on unindexed 10- year bondsd

Headline rate (simple)a

Effectiveb

Realc

2002 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

2.7

4.8

4.3

7.6

May

4.1

4.3

2.3

5.2

4.4

7.9

June

4.1

4.3

2.5

5.0

4.3

7.8

July

4.1

4.3

2.8

4.8

4.3

7.8

August

4.1

4.3

2.5

4.8

4.3

7.8

September

4.1

 

 

 

 

 

 

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.

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

Advanced countries

Interest rate (percent)

Japan

0.00

Switzerland

0.50

US

1.50

ECB

2.00

Denmark

2.00

Norway

1.75

Canada

2.00

Sweden

2.00

UK

4.75

New Zealand

6.00

Australia

5.25

Emerging markets

 

Thailand

1.25

Taiwan

1.375

Chile

1.75

Korea

3.50

Israel

4.10

Mexico

6.60

South Africa

7.50

Brazil

16.00

Turkey

22.00

Other developing countries

 

Czech Republic

2.25

Poland

6.00

Hungary

11.00