After lowering the interest rate last month, the Monetary Committee at the Bank of Israel decided today (Monday) to leave the interest rate in the economy at 0.25% in October. This is in line with the expectations of almost all macroeconomists.
The growth forecast for 2014 dropped to 2.31%, compared to 2.91% in the previous forecast, while the forecast for 2015 remained at 31%. The Central Bureau of Statistics, by the way, published a forecast today according to which the economy is expected to grow in 2014 by only 2.1%, compared to 3.21% in 2013. In terms of growth per capita, this is zero or even negative growth.
According to the Bank of Israel Research Division's estimate, the inflation rate during the four quarters ending in the third quarter of 2015 will be 1% – at the lower limit of the inflation target (1% to 3%). According to the research division's estimate, the Bank of Israel interest rate is expected to be 0.25% during 2015.
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The Bank of Israel notes that the inflation environment remains low, and the assessment has strengthened that the moderation that began in the second quarter continued in the third quarter due to the consequences of Operation Protective Edge. In addition, the shekel weakened by 1.6% this month and continued depreciation will support the recovery. The number of apartment transactions continues to decline, among other things, due to uncertainty regarding the zero-tax program.
The Bank of Israel also notes that the level of spreads on corporate bonds likely indicates overpricing of risks. "In light of the two interest rate reductions that have already been made, the committee decided to leave the interest rate unchanged this month.".
Yesterday, Goldman Sachs economists estimated that Bank of Israel May lower the interest rate by 0.1% today to 0.15% and by the end of the year make another reduction of 0.1% to 0.05%. The interest rate reduction will be made against the backdrop of the slowdown in the growth rate of the Israeli economy, zero inflation (which is expected to drop to a negative level next month) and the slowdown in the real estate market. However, "the Bank of Israel is not expected to take unconventional policy steps in 2014 as the inflation trajectory will return to a positive level in January 2015.".
At the same time as Goldman Sachs, Psagot's chief economist, Uri Greenfeld, published a review in which he estimated that "there is a 25% chance of an additional 0.1% interest rate cut." Greenfeld notes that since the surprising interest rate cut last month, more data has continued to accumulate that illustrates the weakness of the economy. The August index surprised slightly downwards, inflation in the last 12 months stands at 0.%, and without the housing item, we are talking about deflation of 0.7%.
In addition, growth data for the second quarter was revised downward (from 1.7% to 1.5%), with current data showing that a significant impact on exports is also expected in the third quarter, so that together with the impact of the war, it is likely that growth in the quarter ending next week will be zero or perhaps even negative.
