Gaza op forces Bank of Israel to cut 2014 growth view
Central bank economists expect five-year low growth of 2.3 percent for the year, after economy suffers hit from 50-day conflict.
Operation Protective Edge forced the Bank of Israel to reduce its 2014 growth estimate on Monday and it left short-term interest rates unchanged on the view that two previous months of rate cuts were sufficient for now.
The central bank expects Israel's economy to grow at a five-year low of 2.3 percent this year, down from a June estimate of 2.9 percent.
The conflict in July and August kept tourists away and locals at home, taking 0.4 percentage points off growth, the central bank estimated.
IDF tanks on Gaza border (Photo: EPA)
"The negative impact... is mainly reflected in private consumption, where it is expected to be short-term, and in the export of tourism services, where it is expected to be of a longer duration," the Bank of Israel's economists wrote.
For 2015, they maintained a 3-percent growth projection on expectations that activity will return to pre-conflict levels and that an expected global economic recovery will help.
The updated forecasts are more optimistic than those of Israel's statistics bureau, which on Monday estimated growth of 2 percent this year based on available data. That was slightly below the Finance Ministry's revised prediction of 2.4 percent.
Israel, which grew between 3.0 and 5.8 percent between 2010 and 2013, could grow less than a projected OECD average of 2.2 percent this year.
IDF Merkava tank on Gaza border (Photo: Ron Y.)
The central bank had indicated the conflict would shave about a half-point from 2014 growth, based on past experience.
Disinflation
Signs of rapid disinflation and weaker growth in the second and third quarters prompted policymakers to lower the benchmark interest rate a month ago to an all-time low of 0.25 percent, its second straight quarter-point reduction."In light of the interest rate reduction in the past two months, by a cumulative 0.5 percentage points, and the support that the low interest rate level is providing the economy at this time, the monetary (policy) committee decided to keep the interest rate unchanged this month," the bank said in a statement.
All 11 economists polled by Reuters had forecast no move.
Bank of Israel economists expect the key rate to stay at 0.25 percent in 2015. Some analysts, though, believe there may be room for another cut or other policy tools to boost growth but most expect the next move to be a hike late in 2015.
"The Bank of Israel can only hope that the economy improves so they don't have to bring out the 'big guns'"," Meitav Dash brokerage's chief economist, Alex Zabezhinsky, said.
Data in July and August was already pointing to a downturn in the second quarter, and, last week, growth in the quarter was revised to an annualized rate of 1.5 percent from 1.7 percent.
"The assessment that activity had already begun to moderate in the second quarter was bolstered this month," the Bank of Israel said.
The Finance Ministry expects no growth in the third quarter. That was shown by the jobless rate rising to 6.4 percent in August from 6.2 percent in July.
Finance Minister Lapid and Prime Minister Netanyahu (Photo: EPA)
The central bank noted that the inflation environment - with the annual rate at zero in August - and inflation expectations remained low this month and expressed satisfaction that the shekel had weakened.
"Continued depreciation will support a recovery in exports and in the tradable sector," the bank said. The shekel has lost 7 percent against the dollar the past two months to a year low.
Corporate bond funds are again showing new net investment, although at relatively low volumes, the bank said, noting: "Spreads in that market continue to apparently indicate underpricing of risks."
On fiscal policy, the Bank of Israel said it expects a budget deficit of 3.3 percent of gross domestic product this year, above a 3 percent target.
It foresees a deficit of 3.4 percent of GDP in 2015, above a target of 2.5 percent. Bank of Israel Governor Karnit Flug, Finance Minister Yair Lapid and Prime Minister Benjamin Netanyahu remain at odds over the 2015 budget.
