23.12.01


Changes in the Bank of Israel's Monetary Program
December 2001 and January 2002


The Bank of Israel today announced changes in its monetary program (for December 2001 and January 2002), according to which its interest rate will be reduced by 2.0 percentage points to 3.8 percent, effective from Tuesday, 25 December, 2001.

The Bank of Israel explains that this exceptional change in interest-rate policy is being made against the background of the government's decision to revert to a path of fiscal discipline, i.e., the cutback in budget expenses, and the decisions leading to improvements in the financial and foreign-currency markets, as set out below.

The Bank adds that maintaining fiscal discipline in accordance with the government's decision will place the government debt/GDP ratio back onto its downward path, and will contribute to a reduction in medium- and long-term interest rates, while protecting Israel's rating in international markets. This, together with the cut in the short-term interest rate, will encourage investment and support the creation of new jobs.

The Bank of Israel explains that this exceptional change in the interest rate is intended to help the economy emerge from the slowdown which it is experiencing due to external factors, and to boost employment while maintaining price stability. As mentioned above, this amounts to a change in the mix of economic policy, with the maintenance of fiscal discipline over the next few years by setting a downward path for deficit targets from 2002 onwards on the one hand, and expansionary monetary policy on the other. The Bank stresses that it continues to adhere to a policy that supports the stability of both prices and the financial markets and institutions.

These policy changes were formulated against the background of the joint decision of the Minister of Finance and the Governor of the Bank of Israel, in conjunction with the Prime Minister, to introduce the following structural changes in the financial markets:

    1. The abolition of the ceiling on the issuance of Treasury bills, making it possible to replace bank deposits in the Bank of Israel, which are not negotiable, with Treasury bills, which are traded on the stock market. This will create the infrastructure that is needed for the development of the money market.

    2. Increasing the share of investments which institutional investors (provident funds, pension funds, and life insurance funds) are permitted to invest abroad, from the current 5 percent to 20 percent, to be followed by the complete removal of the limit by the end of 2002.

    3. Making the exchange-rate regime more flexible, following several similar adjustments made since 1989, whereby the slope of the lower limit of the crawling band is reduced to zero (i.e., the lower limit is made horizontal) and that limit is lowered by 1 percentage point to a constant rate of NIS 4.1 to the exchange-rate basket.

The Bank of Israel notes the great importance of continuing with the structural changes in the money and foreign-currency markets. The removal of the ceiling on Treasury bills will lead to the development of the market and increase competition between nonbank channels and the banking system by offering a tradable alternative, which will help reduce the banking margin in the local-currency segment. This step will also create an infrastructure for the development of unindexed private securities markets as well as expanding the markets for derivatives in the unindexed local-currency segment. The increase in the share of investment abroad permitted to provident funds, life insurance companies and pension funds from 5 percent to 20 percent and the total removal of the limit at the end of 2002 will enable investments abroad of long-term savings to be spread more widely, to the benefit of the saver, and make the NIS a convertible currency, like the currencies of the developed countries.

These measures, which contribute to the development and greater flexibility of the financial markets, will enable the inflation target to be attained at lower rates of interest.


Changes in NIS and dollar rates

 

ISRAEL

US

Differential between NIS
and dollar rates *
(percentage points)

Interest level (percent, annual rate)

 

December 1998

13.50

4.75

8.75

December 1999

11.20

5.50

5.70

December 2000

8.20

6.50

1.70

Changes in interest rate in 2001 (percentage points)

 

January

-0.2

-0.5

2.0

February

-0.3

-0.5

2.2

March

-0.2

-0.5

2.5

April

-0.3

-0.5

2.7

May

-0.0

-0.5

3.2

June

-0.2

-

2.8

July

-0.3

-0.25

2.75

August

-0.2

-0.25

2.80

September

0.0

-0.50

3.30

October

0.0

-0.50

3.80

November

-0.2

-0.50

4.10

December

-0.3

-0.25

4.05

From 25 December

-2.0

-

2.05

Interest level in 2001 (percent, annual rate)

 

January

8.0

6.0

2.0

February

7.7

5.5

2.2

March

7.5

5.0

2.5

April

7.2

4.5

2.7

May

7.2

4.0

3.2

June

6.8

4.0

2.8

July

6.5

3.75

2.75

August

6.3

3.5

2.80

September

6.3

3.0

3.30

October

6.3

2.5

3.80

November

6.1

2.0

4.10

December

5.8

1.75**

4.05

From 25 December

3.8

1.75

2.05

*  The comparison of interest rates requires reference also to Israel's country risk, which according to international capital markets now ranges from 0.9 percent percentage point (for half a year) to 1.65 percentage points (for 10 years). Note that the risk premium is characterized by volatility which is sometimes caused by factors related to Israel's economy, and sometimes by global events.

** The Open Market Committee of the US Federal Reserve is set to convene on 30 January 2002 for its regular review of interest-rate policy. The current Federal Reserve rate of interest, prior to the review, is
1.75 percent.