Immediately after the Bank of Israel Monetary Committee’s announcement that the interest rate is being cut by 0.25%, Bank of Israel Governor Prof. Amir Yaron held a press conference to explain the cut.
Yaron said, “The Monetary Committee analyzed the various processes and their impact on economic activity and on inflation, and at the end of the discussions, the Committee decided to reduce the interest rate by 0.25% to 4.5%. The interest rate path will be determined in accordance with the continued convergence of inflation to its target, the continued stability in financial markets, economic activity, and the fiscal policy.”
He continued, “Since the war broke out on October 7th, the Bank of Israel has been holding ongoing situation assessments on the war’s effect on the economy and the markets. We are examining these effects at the economy-wide level, at an industry specific level, and by the size of the various businesses and households. It is clear to us that the adverse economic impact suffered by the economy is substantial and its magnitude varies in different areas. Alongside that, we see recovery in overall economic activity. This is an indication that the Israeli economy is succeeding in adjusting to the reality forced upon us.”
“Inflation will return to its target in the first quarter of the year”
On inflation, the Bank of Israel Governor said, “Inflation in Israel exceeds the inflation target of 1%-3%. However, in recent months, a continued decline in the inflation rate and its environment is apparent. This moderation is reflected in the inflation of tradable goods as well as in inflation of non-tradable goods, which is more “sticky”. In addition, the slowdown in the inflation rate can be seen when examining the dynamics among various time ranges. The decline of inflation impacts on the real interest rate as well, which is still at a positive and restricting level, even given today’s decision.
“Furthermore, looking at the inflation forecasts, we see that forecasters estimate that the inflation rate will return to its target over the course of the first quarter. Market expectations for longer terms are also within the target range. These assessments provide us with important information on how market participants see the economic situation and their perception of the monetary policy’s impact on inflation.
“A main factor in its impact on inflation in the coming months will be the foreign exchange market. The high volatility in the shekel exchange rates adds considerable uncertainty. The notable appreciation recently, to the extent that it becomes entrenched, will reduce inflation pressures and will help with its convergence to the target. The policy tools we have implemented so far are consistent with our commitment to return the inflation rate to its target, and the Committee’s assessment is that the current monetary policy supports the convergence of the inflation rate to its target.”
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On economic activity he said, “Consumption using credit cards is recovering, but in the tourism industries, for example, the recovery is slow, as expected. The broad unemployment rate, which rose steeply at the beginning of the war, is declining, but here too there is heterogeneity in the decline according to geographical location, type of industry, and size of businesses.
“The housing market is very important to the economy. Home prices continue to decline, as have rents in recent months. In view of the adverse impact suffered by the construction industry since the start of the war due to a lack of workers, it is important that the government will continue to act to add additional workers to the construction industry as soon as possible. Beyond maintaining construction activity over the medium range, policies should be adopted to keep the supply of construction high over time. This is the key, as I have noted in the past, to continued moderation of housing prices.”
The outline of the interest rate cuts is more moderate than the market was expecting, why does the economic forecast assume such a moderate path?
In response to this question by “Globes,” Amir said first of all, the Bank of Israel is lowering interest rates after its success in stabilizing the markets. “When we saw that we are there and that inflation is very much advancing towards its target, and that all expectations are converging on the target, we cut the interest rate. At the same time, we will do it in a measured way and we are talking about four reductions during 2024 according to the forecast of the research division. In the current conditions of the economy and in the conditions that are expected, this is the right path. Of course we rely on the data that will come. Firstly on the inflation rate convergence and then on maintaining financial stability, within the budget framework.”
Published by Globes, Israel business news – en.globes.co.il – on January 1, 2024.
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