BoI to leave interest rate unchanged, analysts say

For the first time in the central bank’s history the governor will not make the decision alone.

October 23, 2011 22:37
3 minute read.
Bank of Israel Governor Stanley Fischer

stanley fischer 311. (photo credit: Courtesy)


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Seventeen of 20 analysts polled by Bloomberg predict that the Bank of Israel will keep the interest rate for November unchanged at 3 percent. Three analysts believe that it will make another 25-basis point cut to 2.75%.

For the first time in the central bank’s history the governor will not make the decision alone.

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As stipulated in the new Bank of Israel Law (5770-2010), the upcoming interest rate decision will be taken by a four-person monetary council that includes BoI Governor Stanley Fischer, professors Rafi Melnick, Reuven Gronau, and Alex Zuckerman and two bank officials – deputy governor Karnit Flug and senior advisor to the governor Barry Topf.

The interest rate decision will be taken by vote, in which each council member has one vote and the governor has two. Therefore, any major or revolutionary change in decision-making and composition of the decision makers could also effect the decisions. Until now, the Bank of Israel governor made the interest rate decision alone, after consulting with top central bank officials.

Another factor that will draw considerable attention will be anonymity of the interest rate decisions from now on. The Bank of Israel publishes the protocols of the monetary forum meetings that decide the monthly interest rate, without mentioning names of the participants as they had no vote. The question is whether the Bank of Israel will now disclose the names of the council members and their reasons for their votes.

The Bank of Israel says that no decision has been taken on this matter.

Despite the stormy global macroeconomic climate, the monetary council’s first interest rate decision will probably be an easy one, since any decision will probably not face much criticism.

The reason is simple: the interest rate decision-makers face a fundamental dilemma: which is preferable – an interest rate hike to rein in inflation, or higher inflation as a spur to economic growth and job creation.

Updated Central Bureau of Statistics and Bank of Israel figures show that inflation has all but disappeared. The Consumer Price Index fell by 0.2% in September. Inflation in January-September was 2.2%, near the midpoint of the government’s 1-3% inflation target, and inflation in the preceding 12 months through September was 2.9%. Three month trend figures indicate an annualized inflation rate of just 0.3%.

Furthermore, inflation expectations are also down sharply. According to the Bank of Israel, 12-month inflation expectations, as derived from the spread between CPI-linked and unlinked government bond yields (break-even inflation) fell to 1.8% in October from 3% in July. Average 12-month inflation expectations are down to 2.2%.

The drop in inflation expectations coincides with the burgeoning social protest and consumer boycotts, which reinforce assessments that inflation will not be an issue at the upcoming monetary council meeting. Moreover, the Bank of Israel’s mortgage tightening measures of the past two years are still in force, further easing a decision for monetary expansion, i.e. an interest rate cut.

The monetary council has plenty of reasons to make more gradual cuts in the interest rate: macroeconomic figures from Europe and the US are worrying, including job and economic growth (or the lack thereof); and debts and deficits are weighing economic recovery and post real threats to global economic stability. On the domestic front, the global slowdown is already having an effect, especially on exports.

Although labor market figures do not yet reflect the slowdown, the labor market usually lags economic changes.

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