Monetary Policy of Global

Central Bank


At its meeting on 22 July 2014, the Monetary Council reviewed the latest economic and
financial developments and voted to reduce the central bank base rate by 20 basis
points from 2.30% to 2.10%, with effect from 23 July 2014.

In the Council’s judgement, Hungarian economic growth is likely to continue. While the
pace of economic activity is strengthening, output remains below potential and is likely to
approach that level in the course of next year. Despite the pick-up in domestic demand,
capacity utilisation is expected to improve only gradually due to the protracted recovery
in Hungary’s export markets. With employment rising, the unemployment rate is falling, but
still exceeds its long-term level determined by structural factors. Inflationary pressures in
the economy are likely to remain moderate for an extended period.

Based on the inflation data for June, consumer prices continue to show historically low
dynamics. The Bank’s measures of underlying inflation capturing the medium-term outlook
still indicate moderate inflationary pressures in the economy, reflecting low inflation in
external markets, the degree of unused capacity in the economy, subdued wage
dynamics, the fall in inflation expectations and the reductions in administered prices,
implemented in a series of steps. Domestic real economic and labour market factors
continue to have a disinflationary impact and low inflation is likely to persist for a sustained
period. However, domestic demand-side disinflationary pressures are weakening
gradually as activity gathers pace, and inflation is likely to reach levels around 3 per cent
consistent with price stability at the end of the forecast horizon.

Based on data available since the latest interest rate decision, economic growth
continued, as reflected in data for industrial production and retail trade. In the Council’s
judgement, the Hungarian economy returned to a growth path in 2013. Looking ahead,
economic growth may continue in a more balanced pattern than previously, with the
recovery in domestic demand likely to make a greater contribution. Investment is likely to
continue accelerating, reflecting the increasing use of EU funding and the easing in credit
constraints also due to the Bank’s Funding for Growth Scheme. Household consumption is
also likely to grow gradually, mainly as a result of the expected increase in the real value
of disposable income and the reduced need for deleveraging. However, propensity to
save is expected to remain above levels seen prior to the crisis. Based on labour market
data for May, the number of employees, excluding those employed under public
employment programmes, remained broadly unchanged relative to the previous month,
and the unemployment rate fell. The labour market is expected to become tighter.

International investor sentiment was volatile in the past month, mainly reflecting the
escalation of geopolitical conflicts and weaker-than-expected European
macroeconomic data. Hungarian risk premia remained broadly unchanged in the period
and the forint exchange rate depreciated slightly, with country-specific factors playing a
role, in addition to external factors. Hungary’s persistently high external financing capacity

and the resulting decline in external debt have contributed to the reduction in its
vulnerability. The announcement of the Bank’s self-financing concept may contribute to
an improvement in perceptions of the risks associated with the domestic economy. In the
Council’s judgement, a cautious approach to policy is warranted due to uncertainty
about future developments in the global financial environment.

In the Council’s judgement, there remains a degree of unused capacity in the economy
and inflationary pressures are likely to remain moderate for an extended period. The
negative output gap is expected to close gradually at the monetary policy horizon. In the
Council’s judgement, it was justified to end the easing cycle because of the need to
remove uncertainty about the bottom of the interest rate path, and the medium-term
achievement of price stability made it necessary to implement a further 20 basis point
reduction in interest rates. The Council judges that the central bank base rate has
reached a level which ensures the medium-term achievement of price stability and a
corresponding degree of support for the economy. That means that the two-year easing
cycle of a significant cumulative reduction of 490 basis points has ended. Looking ahead,
the macroeconomic outlook points in the direction of persistently loose monetary
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 6 August
Magyar Nemzeti Bank
Monetary Council

The Central Bank of the Russian Federation
(Bank of Russia) On Bank of Russia key rate
On 25 July 2014 the Bank of Russia Board of Directors decided to raise the the Bank
of Russia key rate to 8.0 percent per annum. Inflation deceleration in July 2014 has been
slower than expected. At the same time, inflation risks have increased due
to a combination of factors, including, inter alia, the aggravation of geopolitical tension
and its potential impact on the ruble exchange rate dynamics, as well as potential
changes in tax and tariff policy. The build-up of these risks will lead to inflation
expectations remaining heightened and creates threats of inflation exceeding the target
in the coming years. The adopted decision is aimed at slowing the consumer price growth
to the 4.0% target level in the medium term. If high inflation risks persist, the Bank of Russia
will continue raising the key rate.
In June 2014, the year-on-year consumer price growth rate increased to 7.8% and core
inflation grew to 7.5%. Meanwhile, inflation expectations stayed elevated. The main
reason for inflation acceleration was the effect of the observed ruble depreciation
on prices of a wide range of goods and services. Moreover, there were a number
of specific factors boosting prices for some food items. July has seen signs of inflation
slowdown. However, deceleration in consumer price growth has been slower than
expected. The annual consumer price growth rate stood at estimated 7.5% as of 21 July.
Inflation deceleration was mainly caused by lower increases in administered prices and
utility tariffs. Price growth rates for other goods and services have stabilised as a result
of decreasing impact of ruble depreciation seen in January-March 2014 on consumer
prices, along with improved conditions in food markets due to, inter alia, the new harvest
coming in.
Monetary conditions have been tightening since March 2014, inter alia due
to geopolitical factors. Interest rates on bank loans and ruble deposits increased. Lending
growth slowed down slightly following the acceleration in the previous months. The year-
on-year money supply growth rate has decreased which sets conditions for a decline
in inflation in the medium term.
Over Q2 2014 the moderate recovery of economic activity has been observed.
According to the Bank of Russia estimates, the GDP growth rate was close to zero
in Q2 following negative figures earlier. Low economic growth rates are largely caused
by structural factors. Utilisation of production factors — labor force and commercially
viable production capacities — is high. Labour productivity growth is sluggish. Due to the
demographic trends labour force shortage will continue to affect economic growth in the
long term. Along with structural factors, external political uncertainty has a negative
impact on economic activity. Investment demand remains weak amid low business
confidence, limited access to long-term financing in both international and domestic
markets, and declining profits in the real sector. Besides, consumer activity is cooling.
Economic slack in most countries that are Russia’s trading partners does not contribute
to acceleration in economic growth. At the same time, persistently high oil prices support
domestic economy.

Under the scenario of no negative shocks, annual inflation will decline in the second half
of 2014. The factors of inflation decline are exhausted impact of ruble depreciation seen
in January-March 2014 on consumer prices, lower scale of increase in administered prices
and tariffs, expected good harvest, as well as subdued aggregate demand with
aggregate output of goods and services remaining below potential. At the same time,
there is an increased probability of negative trends which may result in inflation
acceleration. These shocks include aggravation of geopolitical tension, adjustments
in monetary policy of foreign central banks and the potential impact of those factors
on national currency exchange rate dynamics, tax and tariff policy changes under
discussion. Against this background the adopted decision will set conditions for a decline
in annual consumer price growth rates to 6.0-6.5% by the end of 2014 and to the target
level of 4.0% in the medium term. If high inflation risks persist, the Bank of Russia will
continue raising the key rate.
The next meeting of the Bank of Russia Board of Directors on the key rate is scheduled
for 12 September 2014. The press-release on the Bank of Russia Board of Directors’ decision
is to be published at 13:30 Moscow time.

Reserve Bank Of New Zealand raises
OCR to 3.5 percent
Statement issued by Reserve Bank Governor Graeme Wheeler:
The Reserve Bank today increased the Official Cash Rate (OCR) by 25 basis points to 3.5
New Zealand’s economy is expected to grow at an annual pace of 3.7 percent over
2014. Global financial conditions remain very accommodative and are reflected in low
interest rates, narrow risk spreads, and low financial market volatility. Economic growth
among New Zealand’s trading partners has eased slightly in the first half of 2014, but this
appears to be due to temporary factors.
Construction, particularly in Canterbury, is growing strongly. At the same time, strong net
immigration is adding to housing and household demand, although house price inflation
has moderated further since the June Statement.
Over recent months, export prices for dairy and timber have fallen, and these will reduce
primary sector incomes over the coming year. With the exchange rate yet to adjust to
weakening commodity prices, the level of the New Zealand dollar is unjustified and
unsustainable and there is potential for a significant fall.
Inflation remains moderate, but strong growth in output has been absorbing spare
capacity. This is expected to add to non-tradables inflation. Wage inflation is subdued,
reflecting recent low inflation outcomes, increased labour force participation, and strong
net immigration.
It is important that inflation expectations remain contained. Today’s move will help keep
future average inflation near the 2 percent target mid-point and ensure that the
economic expansion can be sustained. Encouragingly, the economy appears to be
adjusting to the monetary policy tightening that has taken place since the start of the
year. It is prudent that there now be a period of assessment before interest rates adjust
further towards a more-neutral level.
The speed and extent to which the OCR will need to rise will depend on the assessment of
the impact of the tightening in monetary policy to date, and the implications of future
economic and financial data for inflationary pressures.

Central Bank of Nigeria Communiqué No. 96 of the Monetary
Policy Committee Meeting, July 21-22, 2014

The Monetary Policy Committee (MPC) met on July 21 and 22, 2014 against the backdrop
of continuing QE3 tapering by the U.S Federal Reserve which has resulted in the slowing of
inflows to emerging markets and frontier economies; and the attendant uncertainties in
the outlook for monetary policy and financial stability in the post-tapering period. The
meeting was attended by 10 members. A new member, Prof. Dahiru Hassan Balami,
whose appointment had recently been confirmed by the Senate, was also in attendance.
The Committee deliberated on key external and domestic economic developments and
considered the Banking Stability Report since the 2 MPC meeting of May 2014 as well as
the outlook for the rest of the year.
The global monetary policy environment appears to be further complicated by risks
posed by continued currency crisis and fragility in Europe, geo-political tensions in the
Middle East and a number of emerging and developing economies. Domestically, the
policy challenges remain. These include the uptick in inflation, anticipated increased
spending towards the general elections and the possible effects of US tapering on the
domestic market.

International Economic Developments
The Committee noted that the rebound in global economic activity strengthened in the
first half of 2014; although at levels lower than previously projected. The tapered growth
arose mainly from the emerging and developing economies owing to the rising real
interest rates and geo-political crisis. On the whole, the effects of the global financial crisis
have continued to wane even as the issues of rising income inequality, unemployment
and poverty appear to be 3 gaining prominence; engaging the attention of the monetary
authorities. These latest projections indicate that the euro area is gradually coming out of
recession, as growth projection for 2014 is positive for all member countries albeit with
significant variation. Growth is expected to be stronger in the core EU countries while high
debt and financial fragmentation continue to weigh on aggregate domestic demand in
the peripheral countries. For the entire euro zone, there is a risk of low inflation or outright
deflation which could result in higher real interest rates that may constrain output
In the emerging and developing economies, growth is projected at 5.0 per cent in 2014
from 4.7 per cent in 2013, buoyed by stronger external demand from the advanced
countries. The key downside risks in the developing and emerging economies include:
political uncertainty, exchange rate realignment in response to changing fundamentals,
further monetary tightening to address emerging currency crisis, and tighter external
financing conditions arising from the rapid normalization of the US monetary policy.
Inflation is 4 projected to remain subdued in 2014 and 2015, partly reflecting the significant
output gaps in the developed economies, weaker domestic demand in developing and
emerging economies, and sliding commodity prices, especially fuels and food. In the
advanced economies, inflation is currently below target and its return to the long run

trend could take a while due to the slow pace of economic recovery. Likely depreciation
in currencies, domestic demand pressure, and capacity constraints could pose upside
risks to inflation in the emerging market economies.
The Committee noted that the stance of monetary policy could diverge across regions
over the medium term on account of variations in risks and other challenges confronting
various economies. The US is expected to commence tightening by the second half of
2015 as inflation hits the long run target and unemployment rate falls to the threshold
level. The euro area and Japan are expected to continue with supportive monetary
policy due to low inflation including threat of deflation in some countries, 5 weak recovery,
weakness in bank balance sheets, and strong demand for their bonds as a result of low
sovereign risk.
Majority of the central banks remained cautious with regard to the stance of monetary
policy. While most advanced economies are likely to maintain an accommodative
stance for monetary policy for the rest of the year to firm up aggregate demand and
employment, the major impetus for monetary policy adjustments in the emerging markets
and developing economies could come from the effects of the US Fed’s tapering of QE3
on their currencies and the financial markets.

Domestic Economic and Financial Developments
The National Bureau of Statistics (NBS) reported revised growth numbers from 2010 to 2013
and the first quarter of 2014, as part of the GDP rebasing exercise. Accordingly, the
estimated growth rate for 2013 now stands at 5.49 per cent, compared with 5.31 and 4.21
per cent recorded in 2011 and 2012, respectively. Similarly, the 6 revised estimate of 6.77
per cent for the fourth quarter of 2013 was an improvement over the 5.17 and 3.64 per
cent in the previous quarter and the corresponding period of 2012, respectively. In the first
quarter of 2014, real GDP growth was 6.21 per cent, which was higher than the
corresponding quarter of 2013. In line with the trend, the non-oil sector was the main driver
of growth in the first quarter of 2014, recording 8.21 per cent growth. The key growth
drivers in the non-oil sector in the first quarter of 2014 remained industry, agriculture, trade,
and services which contributed 1.77, 1.26, 1.26 and 3.15 per cent, respectively. The oil
sector continued to record improvements in performance with its growth rate improving
from -9.36 and -11.40 per cent, respectively, in the fourth and first quarters of 2013, to -6.60
per cent in the first quarter of 2014.
The Committee welcomed the impressive growth performance but noted that the
country has the potential to do better with appropriate supportive macroeconomic
policies. The Committee, therefore, stressed the imperatives for monetary policy to sustain
efforts aimed at supporting non-inflationary growth in key sectors of 7 the economy. The
Committee also emphasized the need for government to sustain and deepen tax
revenue and enhance efforts aimed at fast-tracking the structural transformation of the
economy with a view to making it resilient to adverse shocks as well as creating the
necessary platforms for reducing unemployment, income inequality, and poverty in the


Developments in the aggregate price level suggest an underlying inflationary pressure
since January 2014. The year-on-year headline inflation steadily inched up marginally from
7.9 per cent in April to 8.0 per cent in May 2014 and further to 8.2 per cent in June. The up-
tick in June was, however, largely attributed to the rise in food inflation which rose from 9.7
per cent in May 2014 to 9.8 per cent in June while core inflation, on the other hand, rose
from 7.7 per cent in May 2014 to 8.1 per cent in June. The Committee noted that all
measures of inflation have witnessed progressive upward trend since February 2014 and
agreed that this trend should be monitored closely to achieve a reversal. 8

Monetary, Credit and Financial Markets’ Developments
Broad money (M2) rose by 1.66 per cent in June 2014 over the level at end-December
2013, indicating an annualized growth rate of 3.31 per cent. The annualized growth rate
was considerably lower than the growth benchmark of 15.52 per cent for fiscal 2014. For
the same period, net domestic credit increased by 0.88 per cent compared with the
growth rate of 15.39 per cent over the corresponding period of 2013. When annualized,
net domestic credit rose by 1.77 per cent, compared with the growth benchmark of 28.5
per cent for fiscal 2014. The expansion in aggregate domestic credit was mainly due to
the increase in claims on the private sector which increased by 2.75 per cent in June 2014,
which was however, moderated by the contraction in net credit to Government.
Meanwhile, money market rates remained within the MPR corridor during the review
period. The monthly weighted average OBB rate was 10.38 per cent in May 2014 but it
increased by 14 basis points to 9 10.52 per cent in June. The uncollaterized overnight rate
was 10.50 per cent in June 2014, compared with 10.63 per cent in May 2014. Overall, both
the OBB and overnight call rates were trading closer to the lower bound of the MPR
corridor on account of liquidity surfeit in the banking system. Activities in the capital
market were bullish during the period with the All-Share Index (ASI) increasing by 2.8 per
cent from 41,329.19 at end-December 2013 to 42,482.48 at end-June 2014. Market
capitalization also moved in the same direction.

External Sector Developments
All the segments of the foreign exchange market witnessed a considerable degree of
stability during the period. The exchange rate at the retail-Dutch Auction System Segment
(rDAS) of the market was flat at N157.29/US$ in the review period. At the inter-bank
market, the selling rate opened at N162.20/US$ and closed at N162.95, representing a
depreciation of N0.75 or 0.46 per cent. Conversely, at the BDC segment, the exchange
rate opened at N167.00/US$ and closed at N168.00/US$, representing a depreciation of
N1.00 or 0.6 per cent. 10 Gross official reserves rose to US$40.20 billion by 18 July from
US$37.31 billion at end-June 2014. The increase in reserves was mainly due to increased
accretion and moderation in the rate of depletion.

The Committee’s Consideration
The Committee was satisfied with the relative stability in the macroeconomy as reflected
in the impressive growth rates, stable consumer prices and exchange rate as well as
increased external reserves. It was however concerned about the weak translation of
stability to microeconomic gains in employment and access to finance especially by

small and medium scale businesses. It, therefore, emphasized the need for the MPC
decisions to take into account the long run impact on employment level, wealth creation
and growth of businesses.
The Committee noted the potential of the power sector to stimulate output growth
through enhanced investment and the spill-over effect in employment generation if the
challenges confronting the sector are effectively and appropriately addressed.
Specifically, it 11 noted that gas-to-power has remained a binding constraint in reaping
the benefits of the recently-concluded power sector reforms; urging for the collective
efforts of government, private investors and the banks to resolve. Other pressure points
include the underlying pressure from food/core inflation and the risks that could emanate
from the likely increase in aggregate spending in the run up to the 2015 general elections.
The Committee was also concerned about the implications of the on-going QE3 tapering
for inflows and external reserves. The Committee recognized the necessity of sustaining a
stable naira exchange even as it has to deal with the delicate balancing of the need for
a low interest rate regime. The Committee noted that portfolio flows were not
employment generating but were essential in the absence of adequate fiscal buffers.
The Committee welcomed the moderation in the rate of depletion in external reserves in
recent months, noting that reserves accretion needed to improve much faster to provide
a strong and more resilient buffer to fiscal operations. The Committee, however, noted 12
that a gradual reduction in the country’s import bills through domestic production of some
of the major food imports should be a key element in the overall reserves accretion
strategy. It welcomed the decision of the Bank to collaborate with other stakeholders in
this regard.
The Committee further expressed concern about the liquidity level and the trending
uptick in inflation which may not be unconnected with the poor harvest in some
agricultural producing areas, particularly in the north eastern and central states of the
country. It however, noted that other reform measures could dampen food prices in the
short to medium term and restore inflation to a sustainable long-run path. Overall, the
Committee noted that the policy direction of inflation, exchange rate and interest rate
must be seen not only in the context of price and financial stability but also in enhancing
the quality of life of Nigerians and promoting employment generation. 13

The Committee’s Decisions
In view of these developments, the Committee decided by a unanimous vote to retain
the current stance of monetary policy with one member voting for an asymmetric corridor
around the MPR. Consequently, the MPC voted to:
(i) Retain the MPR at 12 per cent with a corridor of +/- 200 basis points around the
(ii) Retain the Liquidity Ratio at 30 per cent;
(iii) Retain the public sector Cash Reserve Requirement at 75.0 per cent; and
(iv) Retain the private sector Cash Reserve Requirement at 15.0 per cent.


With core inflationary pressures well contained, the Central Bank is maintaining the ‘Repo’ rate at 2.75
per cent which remains supportive of current economic conditions. However, as the pace of economic
activity strengthens, the Central Bank is giving greater consideration to managing inflationary
expectations in calibrating its monetary policy instruments.

As of late July 2014, signals are mixed regarding the outlook for global growth. In its latest
World Economic Outlook (WEO) Update, the IMF indicates that the global recovery
continues but at an uneven pace, and that downside risks remain. In the United States,
earlier optimism about growth prospects has moderated following an unanticipated sharp
contraction in the first quarter of 2014, even though a rebound in activity is already
underway. Growth is improving for some economies in the Euro zone, while the economic
recovery in the United Kingdom appears to be sustainable. Growth in most emerging
markets, including China, remains at a slower pace than before, partly due to softer
external demand.
Although geopolitical tensions are escalating in several regions around the world,
expectations of changes in monetary policy in the major industrial economies dominate
sentiment in global financial markets. The United Kingdom is expected to be the first
advanced economy to raise interest rates, albeit at a moderate pace, while the US
Federal Reserve is not anticipated to raise interest rates until later in 2015. By contrast, the
European Central Bank (ECB) recently announced a package of policy measures to
stimulate bank lending and to address the risk of a prolonged period of low inflation in the
Euro area.
At home, the corporate sector is still cautiously optimistic in its outlook for business activity
and economic strength. Results from the Central Bank’s second Business Confidence
Survey, conducted in the second quarter of 2014 in conjunction with the Arthur Lok Jack
Graduate School of Business, showed that almost 80 per cent of firms expect to increase
their production levels over the next six months. More firms were also confident that the
local economy would improve over the next 12 months than in the first survey. On the
other hand, 66 per cent of all businesses expect their financial position to improve in the
next 12 months, down from 75 per cent of firms in the first quarter of 2014.
A recovery in business lending and steady growth in consumer loans provide support to
the positive business sentiment. On a year-on-year basis, private sector credit granted by
the consolidated financial system expanded by more than 6 ½ per cent in May 2014 – the
fastest rate since February 2009. Business lending grew for the fourth consecutive month,
also, by around 6 ½ per cent in May 2014, from just over 3 ½ per cent in April 2014.
Consumer lending remained robust, growing at around 7 ½ per cent in May 2014.
Meanwhile, the pace of real estate mortgage loans slowed to just over 10.0 per cent in
May 2014 from 14 ½ per cent at the start of the year.
Core inflation remained relatively stable in the first half of 2014. On a year-on-year basis,
core inflation stood at 2 ½ per cent by the end of June 2014. Headline inflation slowed to

3.0 per cent while food inflation eased for the third consecutive month to 3 ½ per cent in
June 2014. Rising consumer demand, higher Government spending and second round
effects from the recent increase in cement prices could help to accelerate inflationary
pressure later in the year.
Excess liquidity in the banking system fell below $5 billion in the first three weeks of July
2014. Commercial banks’ excess reserves dropped to a daily average of around $5.0
billion over the period July 1 – 21, 2014 from a little over $7.5 billion in June and close to
$8.5 billion in May 2014. In June 2014, the Central Bank issued a seven-year, 2.2 per cent
coupon, liquidity sterilization Treasury bond, which removed approximately $1.0 billion
from the financial system. In addition, Central Government’s operations, which are usually
the main source of banking system liquidity, resulted in a net domestic withdrawal of
roughly $1.3 billion in the first three weeks of July 2014. Further, Central Bank’s support to
the foreign exchange market in July also indirectly withdrew $1.1 billion from the system.
Interest rate differentials between TT and US Treasury securities, though still low, have
stabilized in positive territory over the past few months, particularly at shorter tenors. The
three-month domestic Treasury Bill rate increased marginally to 0.13 per cent in mid-July
2014 from 0.12 per cent at the end of June 2014. With the three-month US Treasury Bill rate
holding at 0.03 per cent, the TT-US interest differential widened slightly to 10 basis points as
at July 21, 2014 from 9 basis points at the end of June 2014. Meanwhile, despite the on-
going reduction in the US Federal Reserve’s quantitative easing programme, strong
external demand has placed some downward pressure on longer term US Treasury yields
in recent months. As such, the interest rate differential between TT and US 10-year Treasury
yields remained in positive territory at around 14 basis points as at July 21, 2014 from 10
basis points at the end of June 2014. The Central Bank will continue to closely monitor
economic conditions and is prepared to take further action, if necessary.
The next Monetary Policy Announcement is scheduled for September 26, 2014.

Central Bank Of Israel
The Monetary Committee reduces the interest rate for
August 2014 by 0.25 percentage points, to 0.5 percent

Inflation data: The Consumer Price Index (CPI) for June increased by 0.3 percent, slightly
above forecasters’ projections for an increase of 0.2 percent, on average. There was a
relatively large seasonal increase in the clothing and footwear component, and a
marked decline in the fruit and vegetables component. The inflation rate over the
preceding 12 months was 0.5 percent, and the CPI excluding the housing component
declined by 0.2 percent over that period. The tradable goods components of the CPI
declined by 1.2 percent over the past 12 months. The rate of increase in components
consisting of nontradable products also moderated, and they increased by only 1.4

Inflation and interest rate forecasts: A gradual but continued decline can be seen in
inflation expectations derived from various sources since the April CPI was published.
Private forecasters’ projections for the next 12 CPI readings declined slightly this month, to
1.3 percent on average. Inflation expectations for the coming year derived from the
capital market declined to 1.2 percent (seasonally adjusted), and two-year projections
declined to 1.5 percent. (In the recent period there has been a difficulty in calculating 1-
year expectations because there aren’t CPI-indexed bond series for that range.)
Expectations for the next 12 CPI readings derived from banks’ internal interest rates
declined to 1 percent. Inflation expectations for medium and long terms were virtually
unchanged this month, after they declined markedly since the April CPI was published,
and expectations for medium terms remained below the midpoint of the inflation target
range. Most forecasters are of the opinion that the interest rate will not be reduced in the
coming quarter. The makam and Telbor curves indicate some probability of one interest
rate reduction in the coming three months.

Real economic activity: Data on real economic activity which became available this
month refer to the period before the beginning of Operation Protective Edge, and they
indicate that the economy continues to grow at a moderate rate, similar to that of
previous quarters. It is still too early to tell the economic effects of the security situation, but
the effect of security events of similar magnitude in the past decade turned out to be a
moderate macroeconomic impact, up to about 0.5 percent of GDP (in the Second
Lebanon War). The recovery from previous events was generally rapid, but the negative
impact on some industries, particularly the tourism industry, is liable to last longer. The
Composite State of the Economy Index increased by 0.1 percent in June—its growth rate

was moderated by the trade and services revenue indices and by goods exports. Against
the background of an absence of growth in world trade, goods exports (excluding ships
and automobiles and diamonds, in dollar terms) declined by 9 percent in the second
quarter, after an increase of 3 percent in the first quarter. This was the result of moderation
in high technology and medium-high technology exports, led by declines in exports of
pharmaceuticals and chemicals. Goods imports (excluding ships and aircraft, diamonds,
and fuels, in dollar terms) remained virtually unchanged in the second quarter. Services
exports continued to grow, and they increased by 0.7 percent in April–May compared
with the first quarter. Revenue from trade and services industries continued to moderate,
declining by 1.3 percent in April–May compared with the first quarter. The various indices
of expectations this month are based on surveys conducted before Operation Protective
Edge began. Consumer confidence indices for June were mixed—those compiled by the
Central Bureau of Statistics and Bank Hapoalim declined, after increasing in recent
months, while the Globes index was stable. The Purchasing Managers Index declined
sharply and returned to the range indicating contraction of activity.

The labor market: Labor Force Survey data in recent months have indicated stability;
among the principal working ages (25–64), in May, the participation rate was 79.6 percent
and the employment rate was 75.5 percent, and in April–May they remained virtually
unchanged compared with the first quarter. The unemployment rate in May for that age
range was 5.2 percent, and its average level over April–May increased slightly after
declining in the first quarter. The overall unemployment rate was 5.9 percent in May. The
number of employee posts did not increase in February–April compared with the
preceding three months (seasonally adjusted data), the result of a 0.4 percent decline in
the number of employee posts in the business sector in contrast with an increase of 0.6
percent in the number of employee posts in public services. The job vacancy rate
increased by 4 percent in the second quarter compared to the first quarter. Nominal and
real wages increased by 0.6 percent in February–April, compared to the preceding three
months (November–January, seasonally adjusted data). Health tax receipts, which
provide an indication of total wage payments in the economy, were 5.3 percent higher in
May–June, on a nominal basis, than in the corresponding two months of the previous

Budget data: Since the beginning of 2014, the deficit in the government’s domestic
activity (excluding net credit) was about NIS 2.3 billion, which is about NIS 4.5 billion
smaller than the deficit in the seasonal path consistent with meeting the deficit target for
2014, because the level of expenditure is below the seasonal path consistent with full
performance of the budget—domestic expenditures (excluding credit) in January–June
were about NIS 5.8 billion lower than the path. Tax revenues in June were similar, in real
terms, to those in June last year (excluding legislative changes and one-time revenues,
and excluding extraordinary activities). Gross domestic VAT receipts, net of legislative
changes, one-time revenues, and extraordinary activities were 0.4 percent lower in real

terms in June than in the corresponding month of last year. It is still too early to assess the
effects of Operation Protective Edge on the budget, in terms of both direct defense
expenditures and the cost of compensation and lost tax revenues.

The foreign exchange market: From the monetary policy discussion on June 22, 2014,
through July 25, 2014, the shekel strengthened by 0.5 percent against the dollar and by
1.5 percent against the euro. In terms of the nominal effective exchange rate, the shekel
strengthened by about 0.8 percent this month. For the year to date, the effective
exchange rate has strengthened by about 2 percent. On global markets the dollar traded
mixed this month.

The capital and money markets: No notable effect of the security situation was felt on
financial markets. From the monetary policy discussion on June 22, 2014, through July 25,
2014, the Tel Aviv 25 Index declined by 0.5 percent, similar to the global trend. In the
government bond market, the yield curve of CPI-indexed bonds flattened this month, and
the unindexed-bond yield curve declined by up to 10 basis points. The yield on 10-year
unindexed bonds declined by about 8 basis points, to 2.76 percent. The yield differential
between 10-year Israeli government bonds and corresponding 10-year US Treasury
securities widened slightly, to 30 basis points, but still remains at a low level compared with
recent years. Makam yields increased slightly along the entire curve, and the 1-year yield
is 0.64 percent. Israel's sovereign risk premium as measured by the five-year CDS spread
increased by about 12 basis points, to 90 basis points, after a prolonged decline over the
past year.

The money supply: In the twelve months ending in June, the M1 monetary aggregate
(cash held by the public and demand deposits) increased by 17.3 percent, and the M2
aggregate (M1 plus unindexed deposits of up to one year) increased by 7.7 percent.

The credit markets: Total outstanding debt of the business sector increased by about NIS
5.5 billion (0.7 percent) in May, to NIS 786 billion, primarily as a result of net (nonbank) debt
raised. In the past two months, a halt can be seen in the trend of decline in business
sector debt. In June, the nonfinancial business sector issued bonds totaling about NIS 3.6
billion, compared with a monthly average of NIS 3.1 billion over the past year. Corporate
bond market spreads increased since June, and for the first time since 2012 there was a
monthly negative net new investment in corporate bond mutual funds. However, it is too
early to determine if this is a change in trend. Outstanding household debt increased by
about NIS 3.2 billion (0.8 percent) in May, to about NIS 417 billion. Half of that increase
derives from housing debt. In June, new mortgages taken out totaled about NIS 4.6 billion,
so that monthly new mortgage volume remained at its elevated level. There was an

additional slight decline in risk characteristics of new mortgages due to the steps taken by
the Supervisor of Banks. In June, the interest rate on new mortgages taken out declined
for all indexation tracks—the average interest rate on new CPI-indexed loans declined by
about 0.07 percentage points, and the interest rate on new unindexed loans declined by
about 0.02 percentage points.

The housing market: The housing component of the CPI (based on residential rents)
increased by 0.3 percent in June. In the 12 months ending in June, this component
increased by 2.3 percent, a similar rate to that of the previous two months. Home prices,
which are measured in the Central Bureau of Statistics survey of home prices but are not
included in the CPI, increased by 0.5 percent in April–May. Over the 12 months ending in
May, home prices increased by 8.8 percent, compared with an increase of 8 percent in
the 12 months ended in April. In the 12 months ended in April, there were 45,800 building
starts and 41,900 building completions. The number of new homes built through private
initiative that remain for sale increased by 5 percent in April–May compared to the first
quarter, reaching a historically high level. In April, the number of transactions declined by
25 percent compared to March, and preliminary indications are that this low level was
maintained in May as well.

The global economy: The IMF again revised its 2014 global growth and global trade
forecasts downward—by 0.3 percent. The forecast was reduced for both advanced and
developing economies. In contrast, the forecast for 2015 remained unchanged. In May,
the first quarter’s trend of contraction in world trade continued. Assessments regarding the
US are that the negative growth in the first quarter will not affect the GDP growth rate
during the rest of the year, which will total 3 percent, so that growth for the full year of
2014 will be about 1.7 percent. The recent positive trend in business activity in the US
continues, and is reflected both in data on economic activity and in activity surveys. In
the labor market, total nonfarm payroll employment increased by a greater-than-
expected 288,000 in June, and the unemployment rate declined to 6.1 percent. With that,
salaries are increasing at a moderate pace, and assessments are that the low
unemployment rate derives from the fact that many unemployed individuals have
stopped looking for work. There are also indications of improvement in personal
consumption expenditure and in consumer confidence. Inflation remains below 2
percent, and assessments are that the tapering process will continue as planned, and
that the interest rate will only begin to be increased in the middle of 2015. This month, the
Federal Reserve Chair emphasized that the interest rate tool is primarily intended to
support inflation and employment targets, and less so to support financial stability.
Weakness continues in Europe’s economy: Manufacturing data were disappointing, the
recovery in the employment market is very moderate, and the unemployment rate
remains at 11.6 percent with a decline in the number of unemployed persons. Retail sales
and consumer confidence indices, which serve as an indication of private consumption,
weakened this month, but are still high compared to the period since the beginning of the

crisis. Inflation in the eurozone remained low this month. The ECB did not change eurozone
monetary policy this month, but repeated its commitment to low interest rates for a
prolonged period, and its readiness to make use of unconventional policy tools. Second
quarter data in Japan—high inflation and expectations of negative growth—were
affected by the increase in VAT in April, and assessments are that moderate growth will
resume at a later time. Developing economies presented a relatively positive picture this
month, against the background of low volatility in the markets and continued
accommodative policy in Europe and the US. In China, the economy grew by 7.5 percent
in annual terms during the second quarter, higher than expectations and in line with the
target set by authorities. Oil prices declined by 6.1 percent this month, and the
commodities index excluding energy declined by 4.1 percent.

The main considerations behind the decision

The decision to reduce the interest rate for August 2014 by 0.25 percentage points, to 0.5
percent, 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 1–3 percent a year over the next
twelve months, and to support growth while maintaining financial stability. 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.

Concurrently the Bank has decided to narrow the interest rate corridor in the credit
window and the commercial bank deposit window from ±0.5 percent to ±0.25 percent.
The following are the main considerations underlying the decision:
There was a decline in the inflation environment this month. Inflation measured over the
preceding 12 months declined, as expected, to a level of 0.5 percent, below the lower
bound of the target range. The CPI excluding the housing component declined by 0.2
percent over that period. Since the April CPI was published, there has been a decline in
inflation expectations for all terms, and short-term expectations approached the lower
bound of the target range.
Indicators of real economic activity which became available this month indicate
continued moderate growth, similar to previous quarters. With that, they refer to the
period before the deterioration of the security situation; its moderating effect cannot yet
be estimated. Weakness continues in goods exports, against the background of the virtual
standstill in world trade and the cumulative appreciation, with moderation in high
technology exports. Weakness is also apparent in private consumption over recent

months. Labor force survey data indicate stability, and the growth in the number of
employee posts has halted.
The shekel strengthened by 0.8 percent this month in terms of the nominal effective
exchange rate, and has appreciated by about 2 percent for the year to date. The real
exchange rate is at a level that weighs on growth in the tradable industries—exports and
import substitutes, particularly in light of the virtual standstill in world trade.
This month, the IMF again reduced its global growth and world trade forecasts for 2014,
while leaving the 2015 projections unchanged. In Europe, against the background of
continued low inflation, the ECB reiterated its commitment to accommodative monetary
policy for an extended period of time, and in the US the tapering process continues, while
the assessment remains that the federal funds target rate will not be increased until the
middle of 2015.
Home prices continued to increase in April–May, and the rate of new mortgages taken
out remained elevated, while the risk characteristics of those mortgages continued to
decline due to steps taken by the Supervisor of Banks. The number of housing transactions
declined sharply. Corporate bond spreads continued to widen, but they are still at a low
level. This month, there were net withdrawals from corporate bond mutual funds.

The Bank of Israel will continue to monitor developments in the Israeli and global
economies and in financial markets. The Bank will use the tools available to it 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.
- - - - - - - - - - - - - - - - - - - - - - - -
The minutes of the monetary discussions prior to the interest rate decision for August 2014
will be published on August 11, 2014.

The decision regarding the interest rate for September 2014 will be published at 16:00 on
Monday, August 25, 2014.

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