Feb. 24--In a major surprise, the Bank of Israel Monetary Committee chaired by Governor Dr. Karnit Flug, has cut the interest rate for March by 25 basis points from 1% to 0.75%. The Bank of Israel cited the unexpectedly low Consumer Price Index (CPI) for January, the slowing growth rate, the depreciation of the shekel, and disappointing US growth figures.
The Bank of Israel noted that the CPI rose by 1.4% in the 12 months through January, below the midpoint of the government's 1-3% price stability target and that 12-month inflation expectations are also below the midpoint. It also noted that GDP grew by an annualized 2.3% in the fourth quarter of 2013, and that business sector product rose by just 1.6%.
"The positive turnaround in export data is based mainly on pharmaceuticals exports which are generally volatile, and exports by labor-intensive industries are still in a virtual standstill. Various indicators of activity in January pointed to some recovery, but consumer confidence indices continued to signal pessimism, and data continued to indicate a lack of growth in employment and wages in the business sector," the Bank of Israel warned.
The Bank of Israel added that, in the past month, the shekel depreciated by 1% in terms of the nominal effective exchange rate, and by 7.3% since the beginning of 2013.
The Bank of Israel also pointed to recent disappointing US economic data, after two quarters of rapid growth, though it is too early to determine if it is a temporary slowdown or a turning point downward. In Europe, slow growth continues, and there are growing concerns of deflation. "The accommodative monetary policy in other major economies is expected to continue for an extended period of time," it says.
"Home prices rose by 8.1% in the past year, and the increase in the number of transactions and the high volume of mortgages being granted continue. There is a continued trend of improvement in the risk characteristics of new mortgages," the Bank of Israel added.
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