The Bank of Israel's Interest Rate for August 2005 Remains Unchanged at 3.5 percent

25.7.2005
 
The Bank of Israel’s Interest Rate for August 2005 Remains Unchanged at 3.5 percent
 
The Bank of Israel today announced that in the context of its monetary program for August 2005 the interest rate will remain unchanged at 3.5 percent.
This decision is based on the assessment that in the current circumstances the present level of the Bank of Israel interest rate is consistent with an inflation rate expected to be close to the midpoint of the government's price-stability target of between 1 percent and 3 percent inflation a year.
Regarding the factors which could affect assessments of inflation in the future, the Bank notes that (1) the effect of the recent depreciation of the NIS on the future path of inflation is to increase the probability that inflation will remain close to the midpoint of the target, as it seems that prices will rise faster in the second half of the year than they did in the first. (2) The rate of expansion of real economic activity does not appear to carry with it the threat of inflationary pressures that could endanger the achievement of the price-stability target. (3) Fiscal discipline has gained the public's confidence and is reflected in lower yields in the bond market than in the past, and contributes to economic stability. (4) Developments in the global markets, including changes expected in interest rates and rises in oil prices, have not affected inflation expectations, which are within the target range. (5) Although uncertainty with regard to the economic implications of possible geopolitical developments has risen, it has not led to a change in assessments of future inflation.
The Bank of Israel will continue to keep its interest-rate policy under constant review, with the aim of achieving the inflation target set by the government and of avoiding deviations from it, both upward and downward, and of supporting the whole range of objectives of macroeconomic policy.
 
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
Date Change Interest ratea Change Interest rate
2003 December   5.2   1.0 4.2 3.0
2004 December –1.3 3.9 1.25 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 0.25 3.0 0.5 2.1
June 0.0 3.5 0.0 3.0 0.5 1.9
July 0.0 3.5 0.25d 3.25d 0.25d 1.9
August 0.0 3.5        
 
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, was about 28 basis points in June, similar to its level 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 9 August 2005 for its regular review of interest-rate policy.
   
 
 
Table 2: The Bank of Israel Real Rate of Interest, and Yields in the Capital Market
(monthly average, percent)
Date Bank of Israel rate of Interest Yield on 12 month Treasury bills Nominal yield on CPI- indexed 10- year government bonds Real Yield on unindexed 10- year government bonds
Headline rate (simple)a Effectiveb Realc
2003 December 5.2 5.4 4.6 4.9 4.1 7.0
2004 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 6.6
May 3.5 3.7 2.0 4.0 3.6 6.2
June 3.5 3.7 1.8 4.0 3.7 6.2
July 3.5 3.7 1.6 4.2 3.7 6.3
August 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,
July 2005- and Israel- August 2005 (Percent)
Advanced countries
Japan Switzerland US Norway ECB Canada Sweden Denmark UK Australia New Zealand
0 0.75 3.25 1.75 2 2.5 1.5 2.15 4.75 5.5 6.75
Emerging markets
  Thailand Taiwan Chile Korea Israel Mexico South Africa Brazil Turkey  
  2.75 2 3.5 3.25 3.5 9.6 7 19.75 14.25  
Other developing countries
  Czech Republic Poland Hungary  
1.75 5 6.75