The Bank of Israel's Monetary Committee announced Monday that it will keep Israel's key interest rate for May unchanged, at 0.1%. The decision defied economists' projections suggesting the bank would set a negative interest rate. The shekel strengthened by 0.5% against the dollar following the announcement. "The decision to keep the interest rate for May 2015 unchanged at 0.1% is consistent with the Bank of Israel's monetary policy, which is intended to return the inflation rate to within the price stability target of 1% to 3% a year over the next 12 months, and to support growth while maintaining financial stability," the Bank of Israel said in a statement posted on its website. "The path of the interest rate in the future depends on developments in the inflation environment, growth in Israel and in the global economy, the monetary policies of major central banks, and developments in the exchange rate of the shekel." The bank noted that Israel's Consumer Price Index for March increased by 0.3%, adding that projections for low inflation rates over the next two years have remained the same. "The rate of inflation as measured over the past 12 months was negative 1.0%. Short-term inflation expectations from various sources are near the lower bound of the inflation target range, or slightly below it. Longer-term expectations remained stable around the midpoint of the target range," the bank said. "The increase in home prices continues, and new mortgage volume remains elevated. The number of transactions moderated slightly in February, among investors as well." The Israeli economy's performance continues to be solid, the bank said, noting: "The Composite State of the Economy Index increased by 0.4% in March, and tax revenues increased. Net of extraordinary effects, goods exports increased by 3.3% in March, and declined by 0.9% in the first quarter, in dollar terms." Commenting on the currencies market, the statement noted, "The shekel appreciated by 1.7% in terms of the nominal effective exchange rate. For the year to date, there has been an effective appreciation of 3.7% in the shekel, against the backdrop of accommodative monetary policy in several major economies, among other reasons. A decline in the projected rate of world trade growth and continued appreciation are liable to weigh on growth of exports and of the tradable sector." The International Monetary Fund revised its growth forecasts for Europe and Japan upward, and lowered its projections for U.S. growth and world trade volume, the Bank of Israel noted, adding, "Market expectations indicate that the date for liftoff of the federal funds rate has been pushed off." The bank said it will "continue to monitor developments in the Israeli and global economies and in financial markets
and will examine the need to use various tools to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, and in this regard will continue to keep a close watch on developments in the asset markets, including the housing market." Shraga Brosh, president of the Manufacturers Association of Israel, warned against further appreciation in shekel rates. "I trust the [Bank of Israel] governor to continue to try and curb the appreciation in shekel rates using the various tools at her disposal," he said.
