The Bank of Israel kept its interest rate at 0.5% for July, in its decision announced this evening.
The decision was in line with most analyst's forecasts.
The move, while not surprising, implied that despite rising inflation expectations, and even if actual inflation rises above the 1-3% target range, the Bank of Israel will not raise interest rates in the short to medium term.
The implied message from Governor of the Bank of Israel Prof. Stanley Fischer is that he sees recession as the more serious danger to the economy, rather than inflationary pressures, and that he feels a low interest rate is the tool to use currently to deal with the crisis.
The Bank of Israel can allow itself to maintain the historically low interest rate, since annual inflation is within the target band, and primarily because inflation expectations are near the middle of the inflation target range. The Bank of Israel said that twelve-month-forward inflation expectations calculated from the capital markets remained unchanged in June at 1.9%, close to the midpoint of the target range. Forecasters' expectations, in contrast, increased from their level of 1.9% in May to 2.3% in June.
The Bank of Israel did note that changes in tax rates and in government-supervised prices in the next two months are expected to have a one-off effect on the level of prices, and will raise inflation (measured over the previous twelve months) to close to the upper limit of the target range. Afterwards, forecasts are for inflation to move closer to the midpoint of the range.
Published by Globes [online], Israel business news - www.globes-online.com - on June 22, 2009
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