Governor of the Bank of Israel Prof. Stanley Fischer cut the February interest rate by 25 base points to 4.25%, following December’s cut of 50 base points to 4.5%. The interest rate will now be 1% below the US Federal Reserve Board rate, for the time in Israeli history.
The Bank of Israel said, “Expectations derived from the yield curve imply a further reduction in the interest rate in the course of the next twelve months. Forecasters predict an inflation rate for the next 12 months of 1.9 percent, close to the midpoint of the target range. They also expect, on average, that the Bank of Israel interest rate will reach 4.5 percent at the end of 2007… National accounts data show a return to the high rate of economic growth that characterized the economy in the first half of 2006.”
The bank said that the main considerations behind the interest rate cut were, “Recent economic developments have had counterbalancing effects on the rate of inflation. The reduction in the Israeli risk premium and the increase in the current account surplus of the balance of payments tend to strengthen the currency and reduce the inflation rate. The low budget deficit in 2006 and the expectations for a moderate deficit in 2007, reduce the net pressure of government demand on resources and further contribute to lower inflation. By contrast, the rapid growth that has reduced the output gap, tends to increase inflation. This effect has not yet been expressed in developments in the consumer price index, although there are certainly signs of an effect on local prices, that is, prices that are not directly affected by movements in the exchange rate.”
Published by Globes [online], Israel business news - www.globes.co.il - on January 29, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007