Daily Israel Report

Bank of Israel: Interest Rate for June Unchanged at 2.5%

The Bank of Israel left the country's key interest rate unchanged for June 2012 at 2.5 percent for the fourth month in a row.
By Chana Ya'ar
First Publish: 5/28/2012, 6:38 PM

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The Bank of Israel left the country's key interest rate unchanged for June 2012 at 2.5 percent for the fourth month in a row.  The rate was cut at the end of January by 25 basis points.

The reason given by Bank officials related to the forecast rate of inflation for the coming two or three years, which they said now appear to be 2.4-2.6 percent.

"Expectations for the Bank of Israel interest rate one year from now, based on the Telbor (Tel Aviv Inter-Bank Offered Rate) market, as calculated from the makam yield curve, and the average of forecasters' predictions range from 2.4 percent to 2.5 percent,” officials wrote in the statement released Monday. "Most forecasters predict that the Bank of Israel interest rate will remain unchanged for the next three months.”

The Consumer Price Index (CPI) increased by 0.9 percent in April, in line with forecasts and in line with the seasonal path consistent with achieving the inflation target. The rise in the CPI was attributed primarily to increases in housing and energy prices, in particular the increase in electricity prices.

The Central Bureau of Statistics survey of business trends indicated some slowdown in the improvement in activity in April. With that, companies' expectations reported in the survey and "climate indices" derived from it for May and June regarding activity and employment are positive compared with their levels in previous months.

The Purchasing Managers Index increased again in April, following its increase in the previous month, the Bank reported. The Research Department's index is based on Google searches, which serves as an indicator of demand in the economy in the coming months. It predicts an acceleration in trade and services revenue, compared with previous months. Gross VAT receipts indicate some stabilization of activity in April compared with the previous month. The slowdown in activity is reflected especially in declines of goods exports and goods imports in April, continuing their decline in previous months.

Nevertheless, Bank officials wrote, services exports and imports of services and raw materials have increased since the beginning of the year at relatively high rates compared with the final quarter of 2011.

According to the BOI quarterly staff forecast, compiled in March, GDP growth in 2012 will be 3.1 percent, and 3.5 percent in 2013, with an inflation rate of 2.6 percent over the four quarters ending in the first quarter of 2013, and an average interest rate in the first quarter of 2013 of 2.5 percent.

The interest rate is forecast to begin increasing in the middle of 2013, under the assumption of a recovery in the global economy, officials wrote.