The Bank of Israel's Monetary Program for November 2004

25.10.04

The Bank of Israel’s Monetary Program for November 2004

The Bank of Israel today announced that in the context of its monetary program for November 2004, the interest rate will be unchanged at 4.1 percent for the eighth month in succession.

The decision to leave the interest rate unchanged is based on assessments of inflation one and two years forward-according to inflation expectations derived from the capital market and the predictions of private forecasters-which for a considerable period have been within the price-stability target range, i.e., 1-3 percent a year, and which have been around the mid-point of that range in the last few months.

The stability in the financial markets evident in the last few months strengthens the ability of the Bank of Israel’s policy to maintain price stability at the current interest level. The foreign-currency market continues to be stable-reflected in low bid-offer spreads, with the exchange rate continuing to move without wide fluctuations and with no discernible trend. Since the beginning of the year the NIS depreciated moderately, by between 1 percent and 1.5 percent, against the dollar, the euro and the currency basket. This took place against the backdrop of the continued narrowing of the interest-rate differential, especially that between the NIS and the dollar. In the government bond and Treasury bill markets too calm has prevailed during the last half year, reflected mainly in steady yields, with a slight downward trend.

Nevertheless, if the current situation persists, several developments are likely to affect the behavior of the financial markets and the future path of inflation, and will necessitate a change to the present interest-rate policy in order to preserve price stability as required by the target.

First, the Knesset must without delay approve the proposed 2005 budget along the lines decided upon by the government, including the deficit and expenditure targets. This is essential in order to remove as quickly as possible the uncertainty in this area that derives from the current political uncertainty. Adherence to the deficit and expenditure targets is a prerequisite for halting the rise in the government debt burden and for maintaining interest rates close to the norms abroad, which are required to support economic growth. It is important that the process of approving the budget be transparent, and that it show the overall budget picture. Any slackening of the fiscal discipline that the government is observing strictly and that is embodied in the proposed 2005 budget would cast a shadow over the future preservation of price stability at the current short- and long-term interest rates. Second, the realization of the assessments in the financial markets, including the predictions of the private forecasters, that the process of raising the interest rate in the US will continue, and with it the narrowing of the interest differential between the NIS and the dollar, makes it more likely that a change in the NIS interest rate, when it occurs, will be upwards, in order to maintain price stability.Third, global assessments regarding the continued rise in fuel prices-which hitherto has not affected price developments in Israel-introduce an element of uncertainty about domestic prices, and are likely to result in the need for a higher NIS rate of interest than that currently prevailing.

The current interest-rate policy supports continued recovery in real activity that is based on overall financial stability and price stability in particular. The backdrop to this is a lower level of real interest, especially short-term, than in the past, and a continued rise in the money supply, which does not augur well for price stability.

 

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

2.6

3.7

September

0.0

4.1

0.25

1.75

2.35

3.8

October

0.0

4.1

0.0

1.75 d

2.35

3.6

November

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 is about 52 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 November 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 bonds

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

2.4

4.8

4.3

7.9

September

4.1

4.3

2.3

4.7

4.2

7.7

October

4.1

4.3

2.3

4.8

4.2

7.6

November

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, October 2004

 

Advanced countries

Interest rate (percent)

Japan

0.00

Switzerland

0.75

US

1.75

ECB

2.00

Denmark

2.15

Norway

1.75

Canada

2.50

Sweden

2.00

UK

4.75

New Zealand

6.25

Australia

5.25

Emerging markets

 

Thailand

1.75

Taiwan

1.625

Chile

2.00

Korea

3.50

Israel

4.10

Mexico

7.40

South Africa

7.50

Brazil

16.75

Turkey

20.00

Other developing countries

 

Czech Republic

2.50

Poland

6.50

Hungary

10.50