All members of the Bank of Israel monetary forum advised Governor Stanley Fischer to raise the interest rate for September, according to the minutes of the forum meeting, published today.
The discussions in the narrow forum meeting pointed to the "latest indications that Israel's economy had switched from rapid contraction to moderate growth in a wide range of industries." However, the members also noted, that "activity was still at a low level, that the output gap was expected to continue widening, and that unemployment was expected to increase in the next few months. In addition, there is great uncertainty with regard to the extent to which the recovery would endure."
The participants also discussed the "degree of persistence of the rise in the inflation rate." They claimed that the jump in inflation was due to one-time events, including tax hikes. "The existence of the output gap and the relatively high rate of unemployment will act to moderate inflationary pressures."
The Bank of Israel added, "Since the middle of August, twelve-month-forward inflation expectations derived from the capital market have fallen considerably, to the midpoint of the inflation target range, but this was based on the assumption that the Bank of Israel interest rate will be increased in the next few months."
In addition, the "short-term real interest in Israel was one of the lowest in advanced economies, and in most of those countries inflation next year was expected to be low."
One of the four Bank of Israel members of management in the narrow forum meeting advised a 50-basis point interest rate hike. He pointed to the "high inflation rate in Israel - high relative both to the target and to inflation in the other advanced economies - and the turnaround in the growth rate. He emphasized that this was not necessarily the start of an upward trend in the interest rate, but was a necessary adjustment to its level."
The three members who advised a 25-basis point interest rate hike pointed to the "uncertainty surrounding the transition to positive growth, and the fact that in any case the growth rate was modest and the level of activity low. Moreover, 0.75% interest rate still expressed an expansionary monetary policy, which is still needed at this time."
Published by Globes [online], Israel business news - www.globes-online.com - on September 7, 2009
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