In ominous move, Bank of Israel shows that it's expecting the worst for the economy
Anyone reading the Bank of Israel's announcement and reasons for cutting the interest rate by 25 basis points will find it very hard to point to the circumstances that prompted the decision. In fact, a reading of the statement leaves questions about the decision to cut the interest at this time.
The Bank of Israel's statement presented the usual suspects for the decision: deflation in January; a 1.4% 12-month inflation rate, below the midpoint of the government's target; weak growth figures for the fourth quarter of 2013; weak exports, despite a seasonal jump at the end of the year; and the strengthening of the shekel in recent months. These factors stand out in the statement, but they are not new. The fact is that the Bank of Israel had kept the interest rate at 1% for months, even though all of the factors mentioned in Monday's statement had been extant.
Therefore, it can only be concluded that the Bank of Israel acted, as it has done several times before, not because of what happened in the preceding months, but mainly because of what is liable to happen in the coming months. This usually happened when signs of instability, and even a crisis, began to appear in the global economy. This time too, in view of the assessment that some emerging markets are liable to face a financial crisis and slowdown, the Bank of Israel decided to bring forward the interest rate cut.
The Bank of Israel's statement therefore shows some concern about global economic trends, with growth substantially less than projected at 3.3%. Weather damage, disappointing economic data from Japan, and worries about developments in China just strengthen this feeling. Moreover, the Bank of Israel does not really believe that the slowdown in the fourth quarter of 2013 was fleeting, and tends to think that there is a serious problem with exports of goods, because of the steady strengthening of the shekel. The low inflation rate and the plunge in the Consumer Price Index (CPI) for January reinforce this feeling, and spurred the central bank to act as it did without having to take inflation into account for now.
In other words, the Bank of Israel fears that the slowdown will worsen in the coming months, and it prefers to act now. This fear is strong enough to cause it to cut the interest rate, even though there are no signs that the housing market is calming down, and it notes that prices rose almost 8% in the past year.
If macroeconomic data show that the Bank of Israel's fears have materialized, the chances that it will take stimulus actions increases, and it will seek to use administrative means to try and cool the overheated housing market.
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