The Bank of Israel has announced a surprise 0.25% increase in the interest rate for December 2009, to 1%.
Bank of Israel Governor Prof. Stanley Fischer had been expected to leave the interest rate unchanged for the second consecutive month, after raising the interest rate by 0.25% two months ago after it had stood on 0.5% for many months.
In response the shekel strengthened by 0.8% against both the dollar and the euro to NIS 3.77/$ and NIS 5.65€
The Bank of Israel said that the main consideration behind the decision was inflation. The BoI said, "Inflation measured over the previous twelve months was 2.9%, and in the coming months is expected to be above the upper limit of the target range, although this is largely attributable to the effects of increases in tax rates and government controlled prices. However, one-year-forward inflation expectations increased moderately last month, and are in the upper part of the target range, even though they incorporate expectations of increases in the interest rate in the course of the next year."
The BoI added, "The decision to increase the interest rate for December by 0.25 percentage points will help to establish inflation one year ahead firmly within the target range, after the effects of the non-recurring government initiated price increases have passed."
The Bank of Israel is sanguine on recovery and said, "National Accounts data for the third quarter indicate recovery in economic activity, reflecting a significant increase in private consumption, exports and investments. The recent increase in Israel's exports is aided by the recovery of world trade."
Talking about other central banks the BoI said, "Interest rates of the leading central banks around the world are low, and are expected to remain so during the coming months. That said, the Fed and the ECB have started implementing steps that point to a gradual exit from the non-conventional aspects of monetary policy. In some countries where the recovery has become more firmly established interest rates have been increased."
In conclusion the Bank of Israel noted, "Israel’s economic indicators point to a recovery, but uncertainty persists regarding its strength. Even after this increase, the interest rate in December will be at the low level of 1%, continuing the accommodative monetary policy that is intended to support further economic recovery, particularly in light of the prevailing uncertainty, as well as placing inflation firmly within the target range."
Published by Globes [online], Israel business news - www.globes-online.com - on November 23, 2009
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