Banking

In the second half of 1999, with the continued calm in the foreign-exchange market, and based on an analysis of the inflation environment compared with the target, the Bank of Israel's nominal rate of interest for August and December was cut by a cumulative 0.8 of a percentage point, and for January and February 2000 by almost 1 percentage point (by 0.5 and 0.4 of a percentage point respectively). At the same time, inflation expectations fell faster, so that the ex-ante short-term real interest rate - which affects individuals' decisions in choosing between consumption and investment - rose, reaching 8.7 percent at the end of 1999, its highest level in the year, and the ex-post short-term real interest rate, which is adjusted by the actual rise in prices and affects companies' profits, inter alia, also reached a high level, 11.7 percent. Relative calm was maintained in the foreign-currency market throughout the year, and in the second half the nominal rate of the dollar moved within the exchange-rate band, well away from its limits, despite the fact that the interest rate differential narrowed from month to month. (This can be seen, for example, from the differential between the average LIBOR rate on the currencies of the basket and the Bank of Israel's effective rate, which was 9.76 percentage points at the beginning of the period, and 6.41 percentage points at the end.) The calm seems to be connected with among other things the development of long-term factors due to Israel's improved geopolitical standing resulting from the peace process, liberalization, the consistent disinflation process which raises the economy's growth potential, the trend of Israeli high-tech companies being bought, and greater foreign investment of risk capital in Israel. The monetary base expanded very markedly in the period reviewed, by about 31 percent, annual rate. The M1 money supply grew even faster, by 37 percent. In both of these aggregates the main increase occurred in December, apparently due to preparations for the transition to the new millennium, with individuals and companies opting to hold liquid assets, and wage payments being brought forward.
Until November, the two aggregates grew by 14 percent and 12.6 percent respectively, slower than in 1998 (Table 8), but higher than in the first half of 1999. The other monetary aggregates rose relatively rapidly in the second half of the year: local-currency deposits (mainly short term), and Treasury bills increased faster than the rise in the money supply, and the M2 aggregate rose by about 20 percent. In the period reviewed, bank's deposits in the Bank of Israel in the framework of the auction increased by NIS 5.4 billion to NIS 48.7 billion. The increase of these deposits and the rise in the interest on them contributed to the rise in the central bank's expenses.

The stock market showed renewed buoyancy in July to December; along with the worldwide boom, the index of shares traded on the Tel Aviv Stock Exchange rose by about 20 percent (shares fell by about 4 percent till mid-October, and then surged by 24 percent). The rise in the share-price index encompassed all the stock exchange categories except for real estate and mortgage banks. Capital raised via risk-capital funds increased to $ 640 million in the period reviewed, with software and communications accounting for the whole rise. Indexed bonds yielded a total real return of about 2.5 percent, while un-indexed bonds yielded some 5 percent. Turnover, which fell at the beginning of the period, rose again towards the end, and the value of the stock market also rose. Nevertheless, the extent of new offerings in Israel went down considerably.