The Bank of Israel's Monetary Program for March 2005

21.2.2005
 
The Bank of Israel’s Monetary Program for March 2005
 
The Bank of Israel today announced that in the context of its monetary program for March 2005 the interest rate will remain unchanged at 3.5 percent.
This decision is based on the assessment that the current level of short-term interest is consistent with the price-stability target set by the government, i.e., a rise of between 1 percent and 3 percent a year, long term. The background to the decision is the combination of developments in the economy, in particular the relatively rapidly rising level of economic activity and the effect of the most recent three cuts in the interest rate totaling 0.6 of a percentage point. The Bank of Israel's policy of maintaining price stability at the current interest rate, under the prevailing circumstances, supports the long-term recovery of real economic activity.
Following the latest three cuts in the interest rate, the various indicators of future inflation point to an environment of about 2 percent for the next one and two years––the middle of the target range of price stability––despite the contraction of the interest-rate differential between Israel and overseas. This is the picture that emerges from inflation expectations derived from the capital market, expectations that rose gradually last month from a level just above the lower limit of the target, from the average of the predictions of private forecasters, and from the results obtained from the economic models used by the Bank of Israel. Furthermore, the drop in short-term real interest to 1.7 percent and the decline in capital-market yields to all terms, short, medium and long, that followed the latest cuts in the interest rate reflect the success of the Bank of Israel's policy combined with the fiscal policy and the various government reforms in creating conditions supportive of continued economic recovery. In this context the latest update of the National Accounts data indicate that real economic activity––mainly business-sector product––accelerated in the second half of 2004, and the indicators of activity at the beginning of 2005 also point to continued growth of activity. At the same time financial stability, and price stability in particular, is being maintained, reflecting stability in the foreign currency, bond and Treasury bills markets and the continued gradual improvement in Israel's financial risk.
It is essential that the Knesset approve in the near future the government's proposed budget, which expresses continued long-term fiscal discipline imposed by the adoption of the deficit and expenditure targets and which is intended to reduce the heavy burden of the debt/GDP ratio. The early approval of the proposed budget will remove the uncertainty that still exists with regard to economic policy, and will help to boost the increased interaction with foreign investors and raise the chances of continued economic recovery and improved employment, against the background of price stability and stability in the financial markets.
 
Table 1: Interest Rates in Israel and the US
(Percent)
  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 5.5 5.7 –3.05
2000 –3.0 8.2 1.0 6.5 1.7 –4.0
2001 –2.4 5.8 –4.75 1.75 4.05 1.6
2002 3.3 9.1 –0.5 1.25 7.85 6.8
2003 –3.9 5.2 –0.25 1.0 4.2 3.0
Monthly data            
2004 January –0.4 4.8 0.0 1.0 3.8 3.1
February –0.3 4.5 0.0 1.0 3.5 3.5
March –0.2 4.3 0.0 1.0 3.3 3.8
April –0.2 4.1 0.0 1.0 3.1 3.6
May 0.0 4.1 0.0 1.0 3.1 3.2
June 0.0 4.1 0.0 1.0 3.1 3.0
July 0.0 4.1 0.25 1.25 2.85 3.2
August 0.0 4.1 0.25 1.5 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 2.35 3.4
November 0.0 4.1 0.25 2.0 2.1 3.2
December –0.2 3.9 0.25 2.25 1.65 2.7
2005 January –0.2 3.7 0.0 2.25 1.45 2.6
February –0.2 3.5 0.0 2.25d 1.25 2.3
March 0.0 3.5 0.25d 2.50d 1.0d  
 
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 went down to 40 basis points from 43 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 March 22nd 2005 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 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 2.2 4.8 4.2 7.6
November 4.1 4.3 2.3 4.7 4.2 7.4
December 3.9 4.1 2.7 4.3 4.1 7.2
2005 January 3.7 3.9 2.3 4.2 4.0 6.9
February 3.5 3.6 1.7 4.1 3.8 6.7
March 3.5          
 
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, February 2005
(Percent)
Advanced countries Interest rate (percent)
Japan 0.00
Switzerland 0.75
US 2.50
Norway 1.75
ECB 2.00
Canada 2.50
Sweden 2.00
Denmark 2.15
UK 4.75
Australia 5.25
New Zealand 6.50
Emerging markets
Thailand 2.00
Taiwan 1.75
Chile 2.75
Korea 3.25
Israel1 3.50
Mexico 8.50
South Africa 7.50
Brazil 18.25
Turkey 16.50
Other developing countries
Czech Republic 2.25
Poland 6.50
Hungary 9.00
 
1  Israel's interest rate relates to March 2005