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

29.8.2005
 
The Bank of Israel’s Interest Rate for September 2005 Remains Unchanged at 3.5 percent
 
The Bank of Israel today announced that the interest rate for September 2005 will remain unchanged at 3.5 percent.
This decision is based on the assessment that the present level of the Bank of Israel interest rate is consistent with an inflation rate expected to be close to 2 percent––the midpoint of the government's price-stability target of between 1 percent and 3 percent inflation a year.
Nevertheless, it is noted that information received recently points to the possibility of the creation of forces that would boost inflation, and therefore necessitates a continued meticulous review of economic developments and the rate of interest:
First, the rise in the CPI in July exceeded expectations. At this stage it is premature to determine to what extent this reflects a boost to the inflationary process. The picture regarding inflation will become clearer when additional information on the development of prices is published. Second, the level of economic activity was found to significantly higher than had been estimated for the last eight quarters. The more the output gap (the gap between potential and actual growth) contracts, the greater the chances of a continued rise in inflation. Third, assessments that the interest rate in the US will continue to rise to levels higher than previously expected have become firmer. Fourth, special attention must be paid to the possible implications for prices in Israel of the persistent rises in world oil prices. Fifth, it appears that political uncertainty has risen, which is likely to lead to economic uncertainty.
The Bank of Israel will not hesitate to change the interest rate if the information received from the financial markets and from other sources indicate a rise in the rate of inflation to above the target set by the government. This would be done to achieve the government's inflation target and thereby to support the whole range of objectives of macroeconomic policy.
 
Table 1: Central Bank Interest Rates in Israel and the US
(Percent)
  Israel US Interest rate Differential
Date Change Interest ratea Change Interest rate
2004 December   3.9   2.25 1.65
2005 January -0.2 3.7 0.0 2.25 1.45
February -0.2 3.5 0.0 2.25 1.25
March 0.0 3.5 0.25 2.5 1.0
April 0.0 3.5 0.25 2.75 0.75
May 0.0 3.5 0.25 3.0 0.5
June 0.0 3.5 0.0 3.0 0.5
July 0.0 3.5 0.25 3.25 0.25
August 0.0 3.5 0.25 3.5 0.0
September 0.0 3.5      
 
a The Open Market Committee of the US Federal Reserve is due to convene on 20 September 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 interest rate Yield on 12 month Treasury bills Yield on 10-year government bonds
Headline rate (simple)a Realb Real Nominal Israel–US yield gapc
2004 December 3.9 2.7 4.3 4.1 7.2 2.7
2005  
January 3.7 2.3 4.2 4.0 6.9 2.6
February 3.5 1.6 4.2 3.8 6.7 2.6
March 3.5 1.5 4.1 3.7 6.6 2.0
April 3.5 1.6 4.1 3.8 6.6 2.3
May 3.5 2.0 4.0 3.6 6.2 2.1
June 3.5 1.8 4.0 3.7 6.2 1.9
July 3.5 1.5 4.2 3.6 6.3 1.9
August 3.5 1.6 4.2 3.5 6.2 1.9
September 3.5          
 
a Announced interest rate in simple annual terms (excluding compound interest).
b The real rate of interest is the effective rate of interest less inflation expectations derived from the capital market.
c The yield spread between 10-year unindexed Israel government bonds and 10-year US government bonds.
 
Table 3: Central-Bank Interest Rates in Several Countries,
August 2005- and Israel- September 2005
(Percent)
Advanced countries
Japan Switzerland US Norway ECB Canada Sweden Denmark UK Australia New Zealand
0 0.75 3.50 1.75 2 2.5 1.5 2.15 4.50 5.5 6.75
Emerging markets
  Thailand Taiwan Chile Korea Israela Mexico South Africa Brazil Turkey  
  2.75 2 3.75 3.25 3.5 9.6 7 19.75 14.25  
Other developing countries
  Czech Republic Poland Hungary  
1.75 4.75 6.25
 
aThe risk premium in the 5-year credit-default-swap (CDS) market was about 31 basis points in August, compared to 28 basis point a month earlier.