Bank Of Israel Keeps Rate Unchanged As It Battles Deflation 2

Status quo on key rate

The Bank of Israel kept its headline interest rate unchanged at 0.1% for January 2017. This decision continues to keep its monetary stance as accommodative and is directed towards getting inflation going again. Israel’s central bank aims inflation to be in the 1% to 3% range. The key rate has been unchanged since March 2015, when it had been reduced by 15 basis points.

Inflation refuses to budge

Inflation in Israel continues to disappoint. In its latest reading for November, CPI (consumer price index) inflation contracted by a sharper-than-expected 0.4%. This was below the path envisaged by the central bank. Even after the effect of the fall in energy prices dispersing, inflation has not shown signs of revival.

Importantly, the Bank of Israel noted that inflation expectations in the short-term are below their target level. According to the Bank’s Research Department, “inflation rate will be at the lower bound of the target range within about a year.”

Economic activity is favorable

The Bank of Israel noted that “Based on preliminary data from the Companies Survey, it may be assessed that in the fourth quarter as well, business sector product grew at a pace similar to that of previous quarters.” The Bank’s Research Department assessed that Israel’s GDP (gross domestic product) rose by 3.5% in 2016 and will continue to rise around or a bit over 3% in the coming years.

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Among labor market metrics, unemployment is low and wages continue to witness a rise.

There is some pressure on exports, though, because of the strength of the shekel. According to the central bank, between November 27 and December 23 this year, the shekel rose 1.3% against the US dollar. This is the case when the greenback has been pummeling most of its major peers.

Israel equities

Israel equities have had a forgettable year. Among the MSCI country indices, the index for Israel is the worst performing among developed markets, having declined by 26.3% in YTD 2016 until December 27. Denmark is a distant second, having fallen 18.3% in the same period.

Among ETFs investing in Israeli equities, both the iShares MSCI Israel Capped ETF (EIS) and the VanEck Vectors Israel ETF (ISRA) are down 4.2% each in the aforementioned period. Interestingly, though 99.8% of the EIS is invested into Israeli securities, they form only 68.7% of the ISRA.

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