The Bank of Israel interest rate for December 2007 nremains unchanged at 4 percent

The Bank of Israel interest rate for December 2007 remains unchanged at 4 percent
The Bank of Israel announces that the interest rate for December 2007 will remain unchanged at 4 percent. This is consistent with the policy of maintaining price stability, as expressed by the inflation target of 1–3 percent a year.
Background conditions
Inflation data: The Consumer Price Index (CPI) rose in October by 0.1 percent, slightly higher than the forecasts. In the last twelve months the CPI has risen by 2.2 percent, and since the beginning of the year by 2.4 percent.
Inflation forecasts: Israeli forecasters expect, on average, that the 2007 inflation rate will reach 2.5 percent, and that inflation over the next 12 months will be 2.2 percent. At the same time they expect, on average, that the Bank of Israel’s interest rate will rise by half a percentage point by the end of 2008. Expectations of inflation over the next 12 months derived from rates of return in the capital market are around 1.2 percent, the same as a month ago. Derived expectations of the Bank of Israel interest rate are that it will remain unchanged over the next few months. The Bank of Israel's models indicate that at the current level of interest, inflation over the next twelve months will be within the target range.
Real economic activity: National Accounts data for the third quarter show that the growth trend continued. GDP grew by 6.1 percent in that quarter, and business sector product by 6.6 percent. If the US economy slips into a recession in 2008 that results in a significant slowdown in world trade––the probability of which has risen in the last few weeks––GDP is expected to grow by only 3.6 percent in 20081. This compares with a 4.4 percent growth forecast if the US economy is only moderately affected by the crisis, in line with the IMF assessments of last October.
The labor market and wages: Trend data of the rate of unemployment in August––the last month for which data are available––remained steady at 7.8 percent. On the other hand, the downward trend in the number of job seekers continued in September, supported by the continuing increase in the number of employee posts: in June–August that number was 4.3 percent higher than in the equivalent period in 2006. The nominal wage was 2.6 percent higher in June–August this year than in June–August 2006. At the same time, the wage in the public sector rose by 3.4 percent. Most industries in the business sector also showed wage increases.
Budget policy: The total budget surplus since the beginning of the year reached NIS 8.7 billion, and it is reasonable to expect that the budget this year will end close to balance. At a time when global economic developments and their effect on Israel’s economy are unclear in light of the credit crisis, it is important that the budget framework, which played a major role in economic growth over the last few years, be strictly adhered to. Hence it is important that the proposed budget for 2008, which has been approved by the government and has passed its first reading in the Knesset, be passed in accordance with the budget guidelines to which it adheres.
The forex market: Between the previous interest rate decision on October 28 and November 25, the dollar weakened by 3.4 percent against the shekel, and the shekel remained stable against the euro. The weakening of the dollar against the shekel was part of the global trend of the weakening of the dollar against most currencies. The Bank of Israel’s forecasts relating to the current account and capital imports in 2008 are that the basic pressures for the strengthening of the shekel against the dollar will ease, contrary to the trend prevailing in the last few years.
The capital and money market: Since the previous interest rate decision (28/10) the Tel Aviv 25 share index has held steady, unlike the leading indices world wide that recorded drops of between 5 percent and 10 percent over the same period. At the same time the yield on 10-year unindexed Israel government bonds remained stable at around 5.5 percent, similar to its level in the previous month. The yields on 10-year US government bonds, on the other hand, continued to decline, so that the gap between yields on Israel government bonds and US government bonds widened to 1.63 percentage points from 1.3 percentage point in the previous month. After about three years when total credit to the business sector rose at rates similar to the growth rates of nominal business sector product, this year an accelerated rise in credit is evident, with most of the increase coming from non-bank sources. Israel's sovereign risk premium as measured by the five-year CDS spread rose from 0.22 percent to 0.37 percent, in line with the rise in risk premiums in financial markets around the world.
The world economy: The crisis in the financial markets that began in July and eased a little in October worsened again last month, and significant price declines in financial markets resumed. This came in the wake of a series of announcements about declines in financial institutions’ profits in the third quarter and pessimistic profit forecasts for the last quarter of the year. The prevailing assessment is that the credit crisis will have the effect of reducing the volume of credit, particularly in the US, thus increasing the risk regarding the level of economic activity and growth in the US and around the world. Forecasts published by the Federal Reserve last week also predicted a significant slowdown in growth. Most assessments at present are that the impact on world growth will be moderate. Risks of inflation around the world have risen recently, particularly because of increases in the prices of oil and food, but in light of the credit crisis central banks are not expected to raise interest rates, and the Fed is currently expected to reduce its interest rate at its December meeting.
The main considerations behind the decision
  Based on expectations derived from the capital market, private forecasters’ predictions, and the results of the Bank of Israel’s models, it appears that the current month’s level of interest is consistent with the achievement of the price-stability target over the next twelve months.
  With regard to the factors affecting inflation, the continuation of growth creates price pressures that are reflected in local prices. In addition, world prices of energy and food are rising. At the same time, the weakening of the dollar against the shekel tends to reduce inflation in Israel.
  Furthermore, the effects of the financial crisis on the global economy are likely to serve to moderate the inflation rate in Israel.
The Bank of Israel will continue to monitor economic developments closely with the intention of achieving the price-stability target. Subject to this, the Bank will continue to support the attainment of a range of objectives of macroeconomic policy, in particular the encouragement of employment and growth. In addition, the Bank will continue to support the stability of the financial system.