Concerns about the appreciation of the shekel and the low interest rate environment in Western countries were among the main factors that led the Bank of Israel to keep the interest rate unchanged at 0.75% for October 2009, according to the minutes of the monetary forum for the decision, published today. The minutes also imply that Israel's interest rate will stay low in order to support economic recovery.
The Bank of Israel states, "The recovery in economic activity is gradual, and it is important to continue supporting it. It is expected that the slow global economic recovery will be accompanied by a slow process of interest rate rises."
One of the four members of the narrow monetary forum advised Governor of the Bank of Israel Prof. Stanley Fischer to raise the interest rate, taking into consideration the fact that the Bank of Israel predicts 2.5% GDP growth in 2010 and that 12-month inflation expectations are around the mid-point of the government's 1-3% inflation target, at 2.2%.
The three members of the narrow monetary forum who recommended keeping the interest rate unchanged noted that inflation was within the target range, especially when the effects of the tax hikes enacted in the past few months are excluded. They also pointed to the production gap, which is also reflected in an unemployment rate that is higher than the full employment rate, which is expected to act as a brake on inflation over the coming year.
One of the main factors in the interest rate decision for November was shekel exchange rates. The protocols note concerns that an interest rate hike in Israel, while the US interest rate remained unchanged would widen the interest rate differential between the two countries resulting in capital inflows to Israel, which would strengthen the shekel against the dollar.
The Bank of Israel states, "Not raising the interest rate this month prevents the differential between the local interest rate and foreign rates from widening, and therefore has the effect of reducing the supply of foreign currency in the foreign currency market. In addition, it is part of the Bank of Israel's policy to buy foreign currency if necessary. Foreign currency purchases by the Bank of Israel moderate the strengthening of the shekel, and support the recovery in economic activity."
Having established a close link between Israel's interest rate and foreign interest rates, the Bank of Israel went to say that interest rates in other countries "are expected to remain at their very low levels until after the beginning of 2010." It thereby signaled that the interest rate in Israel will stay low in the coming months.
Analysts expect the Bank of Israel to raise the interest rate to 2.5% over the next 12 months.
Published by Globes [online], Israel business news - www.globes-online.com - on November 9, 2009
© Copyright of Globes Publisher Itonut (1983) Ltd. 2009