stanley fischer 311.
(photo credit: Courtesy)
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
For the first time in the central bank’s history the governor will
not make the decision alone.
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.
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.
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
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
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
Although labor market figures do not yet reflect the slowdown,
the labor market usually lags economic changes.