BOI: No more rate cuts likely for now
Bank of Israel minutes show further interest rate cuts unlikely given signs economy is improving, residual concerns about lively housing market
The Bank of Israel cut rates last September and December to support an economy whose growth rate fell to 3.1% in 2012 – its slowest pace since 2009 – from 4.6% in 2011.
At its February 25 meeting, five of six monetary policymakers voted to keep the benchmark rate at 1.75% for a second straight month, while one official sought a quarter-point reduction.
While expressing concerns about a decline in exports, policymakers argued loose monetary policies globally were supporting capital inflows to Israel, mitigating the impact of the strong shekel, which has hit a 16-month high against the dollar.
Those who supported unchanged rates said recent data on the economy and economic expectations "may point toward an end to the slowdown," the minutes showed.
"In addition, reducing the interest rate may act to spur housing prices, while further steps on the supply side are not expected to have an effect in the coming months."
The central bank saw no signs that housing market activity was moderating, but policymakers said data did not reflect the effects of steps by the banking regulator requiring banks to raise capital buffers against mortgage risk.
The Bank of Israel said the level of inflation was not a barrier to cutting rates "if that becomes necessary." Inflation expectations for the coming year are below 2% - the midpoint of a government target of 1-3% a year.
The central bank projects economic growth of 2.8% in 2013 excluding the start of natural gas production. It may revise its forecast at its next policy meeting on March 24.
Reiterating earlier comments, the Bank of Israel also reminded the new government taking office this week that further austerity measures would be needed to hit budget deficit targets for 2013 and 2014.
"Failure to meet those targets will ... negatively impact the credibility of budgetary policy, especially since the economy is operating close to full employment," the minutes said.
