"The global slowdown is liable to cause a slowdown in the rate of economic growth in Israel, which would moderate the rate of inflation," states the Bank of Israel in the minutes of the interest rate decision for July. Governor of the Bank of Israel Stanley Fischer kept the interest rate unchanged at 3.25%.
The narrow monetary forum discussed difficulties of Israeli exporters, due to the worsening conditions in target markets in the US and Europe. Exporters have to cope with the strengthening of the shekel, which is liable to worsen due to the wide interest gaps between Israel and the US and Europe.
Belying Ministry of Finance concerns of a possible shortfall in tax revenues, the Bank of Israel states, "Tax revenues this year are expected to exceed the forecasts used as the basis for the budget, and the deficit is expected to be lower than the maximum 3% of GDP defined by law, even assuming full expenditure of the budget."
The narrow monetary forum also discussed the effect of policies to cool down the real estate market. All the participants said that it was premature to see the effect of various policy measures in the available data. "The effect will be reflected in the data of the next few months, at the earliest, and is expected to continue during the next two years; more time is needed before the extent of the policy measures’ effect on house prices can be assessed. Moreover, the effect of the interest rate on the share of houses for investment purposes is very slow, and is just starting."
The minutes reveal disagreements between the top Bank of Israel officials about future developments in the real estate market. The member of management who recommended increasing the interest rate this month added that in his opinion the house price problem required action to be taken this month, either via the interest rate or via other policy measures.
This led to a discussion of the need for another macro-prudential measure in the housing market. The participants expressed concern that the introduction of too many policy measures in addition to increases in the interest rate could result in a sharp drop in house prices instead of a gradual decline.
The Bank of Israel Research Department predicts that inflation in 2011 will exceed the 3% inflation target ceiling, and that it will only come back within the target range early next year. The Research Department also expects the interest rate to rise gradually to an average of 4.1% in the second quarter of 2012.
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