The Bank of Israel's Interest Rate for April 2005 will Remain Unchanged

28.3.2005
 
The Bank of Israel’s Interest Rate for April 2005 will Remain Unchanged
 
The Bank of Israel today announced that in the context of its monetary program for April 2005 the interest rate will remain unchanged at 3.5 percent.
In the prevailing circumstances, the present level of nominal short-term interest is consistent with the government's price-stability target of between 1 percent and 3 percent in annual terms, over time. The backdrop to this is the persistent stability in the capital and foreign-currency markets and some measure of decline in uncertainty in the economy support this assessment. It is worth repeating that the policy of maintaining price stability at the current level of interest under the existing circumstances supports the recovery of real economic activity long term.
The various indicators of future inflation suggest that in the prevailing circumstances, including the present short-term nominal interest rate, inflation in the next one and two years is expected to be around 2 percent a year, i.e., in the middle of the target range, similar to the picture that emerged last month. This is the conclusion derived from the data on inflation expectations calculated from the prices of government bonds in the capital market and from the predictions of various private forecasters. It is noteworthy that inflation expectations derived from the capital market for longer periods, up to ten years, are also within the target range. These assessments draw support from the continued stability in the capital and foreign-currency markets. Thus, the stability of the exchange rate has been preserved and is even firmer than that of many other countries, Israel's financial risk continues to decline, the share of CPI-indexed assets in the public's financial-assets portfolio continues on its downward path, and the share of long-term assets in total local-currency unindexed assets is still rising.
The importance of Knesset approval of the proposed budget for 2005 must be re-emphasized; this would reduce the uncertainty with regard to macroeconomic policy that rests inter alia on further long-term fiscal discipline determined in the context of deficit targets and targets for government expenditure. It is expected that this will make Israel's economy more attractive to domestic and foreign investors, and will increase the chances for sustained recovery in economic activity and continued improved in the employment situation, against the background of financial and price stability.
 
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 2.25 1.25 2.6
March 0.0 3.5 0.25 2.50 1.00 2.1
April 0.0 3.5 0.25d 2.75d 0.75d  
 
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 33 basis points from 40 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 May 3rd 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 3.7 1.6 4.2 3.8 6.7
March 3.5 3.7 1.4 4.1 3.7 6.6
April 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, March 2005
(Percent)
Advanced countries Interest rate (percent)
Japan 0.00
Switzerland 0.75
US 2.75
Norway 1.75
ECB 2.00
Canada 2.50
Sweden 2.00
Denmark 2.15
UK 4.75
Australia 5.25
New Zealand 6.75
Emerging markets
Thailand 2.25
Taiwan 1.75
Chile 2.75
Korea 3.25
Israel1 3.50
Mexico 8.50
South Africa 7.50
Brazil 19.25
Turkey 15.50
Other developing countries
Czech Republic 2.25
Poland 6.50
Hungary 8.25
 
1Israel's interest rate relates to April 2005