Governor of the Bank of Israel Prof. Stanley Fischer has raised the interest rate for September 2007 by 25 basis points to 4%. This is the second consecutive monthly hike. Fischer made the announcement by secure video conference from the US.
The Bank of Israel said that the rate hike “is consistent with the policy of maintaining price stability, as expressed by the inflation target of 1-3% a year.”
The central bank again gave no hint regarding its upcoming interest rate decisions. Many analysts believe that Fischer will now take a time-out of a month or two before raising the interest rate again. However, he will be closely watching market developments.
The Bank of Israel said, “The decision to raise the interest rate by a relatively modest 0.25 percentage points was influenced by factors likely to moderate the forces of inflation in the future, which stem from the continuation of underlying forces that support the value of the shekel - the continued surplus in the current account and the inflow of capital - and from the expectations of a reduction in the interest rate in the US, which will contribute to the contraction of the interest-rate gap between the shekel and the dollar. P
“The Bank of Israel notes that despite the rise in uncertainty in the financial markets, the markets in Israel are functioning well and have suffered no problems of liquidity. This is in contrast to the case in several developed countries.”
The central bank said, “According to the Bank of Israel's econometric models, in the past 12 months local prices - the price component that is not directly affected by changes in the shekel exchange rate - have risen at a rate in excess of the upper boundary of the target inflation range… Local forecasters expect, on average, that the inflation rate for 2007 will reach around 3% (the upper boundary of the target inflation range), and that inflation over the next 12 months will reach the midpoint of the range, 2%. At the same time, they expect, on average, that the Bank of Israel will raise the interest rate, and that in a year's time it will stand at 4.5%. The expectation of inflation over the next 12 months, as derived from the capital markets, stands at around 2%. The market also expects that the interest rate will rise over the next 12 months. The Bank of Israel's econometric models also imply that the interest rate needs to be raised if inflation is to be within the target range in the next 12 months and in 2008.”
As a result of today’s interest rate hike, the interest rate gap with the US is now 125 basis points. If Federal Reserve Board Chairman Ben S. Bernanke cuts the dollar interest rate by 25 basis points to 5% in September, the interest rate gap will narrow to 100 basis points.
Published by Globes [online], Israel business news - www.globes.co.il - on August 27, 2007
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