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

25.4.2005
 
The Bank of Israel’s Interest Rate for May 2005 will Remain Unchanged
 
The Bank of Israel today announced that in the context of its monetary program for May 2005 the interest rate will remain unchanged at 3.5 percent.
All the indicators suggest that with a view one and two years forward, the present level of nominal short-term interest, under the current circumstances, is consistent with an inflation rate of about 2 percent, around the midpoint of the government's price-stability target of between 1 percent and 3 percent in annual terms, over time. This is the conclusion derived from the inflation expectations calculated from the capital market, from the predictions of various private forecasters, from the economic models used by the Bank of Israel, and from the responses of about 500 companies that participate in the Bank's Companies Survey, with almost 85 percent of them expecting inflation in the next twelve months to be within the price-stability target range.
The Bank of Israel's policy of maintaining price stability at the current level of interest under the prevailing circumstances is supported, inter alia, by the continuing stability of the capital and foreign-currency markets, and by the relatively low level of uncertainty in the economy. This interest policy, one expression of which is the expected rate of short-term real interest of about 1.6 percent, supports the continued recovery of real economic activity in the long run. In this context the Bank's assessment for 2005 should be borne in mind that GDP will rise by about 4 percent, that business-sector product will rise by about 5 percent, and that unemployment will continue falling.
Although the risk premium of some emerging markets has risen, Israel's has remained low, a further reflection of the notable stability from which the domestic financial markets, including the foreign-currency market, are benefiting. The stability of the exchange rate in Israel has been preserved and has even surpassed that of many other countries; the financial risk of Israel's economy is low and has even declined slightly; medium- and long-term yields––to 10 and 20 years––are steady; medium- and long-term inflation expectations––up to 10 years––are within the price-stability target range; the share of CPI-indexed assets in the public's asset portfolio is on a downward path; and the share of long-term assets in the total of local-currency unindexed assets is rising.
 
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 1.0 2.0
April 0.0 3.5 0.25 2.75 0.75 2.3
May 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 30 basis points from 33 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 1.5 4.1 3.7 6.6
April 3.5 3.7 1.6 4.1 3.8 6.7
May 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, April 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 5.50
New Zealand 6.75
Emerging markets
Thailand 2.25
Taiwan 1.875
Chile 3
Korea 3.25
Israel1 3.5
Mexico 9.4
South Africa 7
Brazil 19.5
Turkey 15.0
Other developing countries
Czech Republic 2
Poland 6
Hungary 7.75
 
1Israel's interest rate relates to May 2005