The Bank of Israel announced today (Monday) that it will leave the interest rate in the economy for November unchanged at 0.25% - and hinted that it may launch a quantitative easing program later.
""The Monetary Committee believes that the effects of the recent interest rate cuts, to a level of 0.25%, have not yet been fully reflected in activity and inflation, and has decided to leave the interest rate unchanged this month," the interest rate announcement reads. "The Bank of Israel will use the tools at its disposal, and will examine the need to use various tools in order to achieve its goals." In doing so, the bank hints that it may launch a quantitative easing program such as bond purchases in the future.
""The inflation environment continued to decline this month," the statement said. "According to the indicators added, activity in the third quarter slowed and may even have declined, mainly due to Operation Protective Edge. In light of interest rate cuts and the strengthening of the dollar in the world, the shekel weakened by 2.8% this month in terms of the effective exchange rate. Continued depreciation will support the recovery of exports and the return of inflation to the target.".
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Capital market analysts expected the Bank of Israel to reduce the interest rate to 0.1%-0.15% and also that the bank would hint at its intention to launch a quantitative easing program. Now, after the interest rate announcement was published, analysts estimate that the Bank of Israel is effectively admitting that the interest rate cut is no longer effective and is preparing the ground for quantitative easing.
""The most interesting question that arises from the Bank of Israel's interest rate decision is whether the decision was made because the bank prefers to wait and see how the economic picture changes in the days after 'Protective Edge', the previous interest rate cuts and the weakening of the shekel, or whether the Bank of Israel understands that an additional interest rate cut will probably not have any effect on the state of the economy in any case," said Uri Greenfeld, Psagot's chief economist. "We tend to think that this is a combination of answers and evidence. In the concluding paragraph of the announcement, the Bank of Israel added that it 'will examine the need to use various tools in order to achieve its goals.'.
""In other words, the Bank of Israel prefers to wait and, if necessary, since the interest rate is no longer effective, will use unconventional tools such as quantitative easing. Looking ahead, the inflation environment is expected to remain low for a long time to come. Admittedly, the low inflation is also a result of government policy and increased competitiveness in the economy, trends that the Bank of Israel cannot (and should not) influence, but in order to meet its targets, it is certainly possible that in the coming months we will indeed see the Bank of Israel use sharp tools to ease the monetary environment in the economy.".
""The Bank of Israel is on its way to new and aggressive places""
""The Bank of Israel's ammunition depot is almost completely depleted of interest rate weapons, and this is probably the reason for the decision to leave the interest rate unchanged," said Shmuel Ben-Aryeh, research director at Pioneer Group. "It will be very interesting to see what will happen if the price index does not rise and demand remains low. Following this announcement by the Bank of Israel that it will use the various tools at its disposal, we understand that it is aiming for new and more aggressive places with an act of quantitative easing. The Bank of Israel's goal in maintaining such a low interest rate environment is to make money cheaper and get the public to go out and consume, thereby stimulating the local economy.".
In the interest rate announcement, the Bank of Israel provided a hint that the economy may have reached a turning point and hence growth will strengthen: "There was no significant deterioration in confidence indices despite Operation Protective Edge, and an improvement was recorded in the purchasing managers' index.".
""Despite expectations in the capital market for an interest rate cut, the Bank of Israel chose to wait with another interest rate cut," said Ilan Artzi, Chief Investment Officer at Hellman Aldubi. "Despite the weakness in the economy, the interest rate tool is no longer effective and its impact on the economy is not noticeable. The Bank of Israel must think of additional ways to monetary support the economy, and we may see quantitative easing in the coming months.".
The research department of Alumot Sprint Mutual Funds stated that "the Bank of Israel is linking the decision to keep the interest rate unchanged to the increase in the nominal exchange rate, in the expectation that this will contribute to an increase in inflation and that the effects of the recent interest rate cuts have not yet matured. Given the zero effectiveness of further interest rate cuts, the Bank of Israel did well to leave the interest rate unchanged. The central bank would do well to give sufficient time for the monetary processes to mature and to consider carefully and seriously before resorting to the use of 'various tools', i.e. 'unconventional' monetary measures, the undesirable consequences of which on economic activity and their contribution to the creation of asset bubbles could be dangerous.".
