The Bank of Israel has announced a 0.25% increase in the interest rate for January 2009, to 1.25%.

This is the second consecutive month that Bank of Israel Governor Prof. Stanley Fischer has hiked interest rates by 0.25% and the third time since last August when rates were at an historic low of 0.5%.

The rate hike is in line with market expectations although some analysts such as Goldman-Sachs had predicted that Fischer would leave the interest rate unchanged.

Once again the Bank of Israel cited inflation fears as one of the reasons for raising the interest rate.

The Bank of Israel said, "The decision to increase the interest rate for January was taken in light of the inflation environment in Israel, which is in the upper part of the price stability range, against the background of growth that is becoming more firmly based and the increase in prices of assets, including housing. Nevertheless, even after this increase in the interest rate, monetary policy continues to be expansionary. This increase in the interest rate is part of a gradual process of returning interest to a "normal" level; the path of the return will be determined in accordance with the degree of firmness of growth, both global and in Israel, the rate at which the major central banks increase their interest rates, and the inflation environment."

The statement continued, "Inflation measured over the previous twelve months was 3.8%, and excluding the effects of increases in taxes and in government controlled prices, it was 2.6%. One-year-forward inflation expectations are slightly below the upper limit of the target range; these are accompanied by expectations of increases in the interest rate next year."

The statement was upbeat about the economy. It said, "Recent economic indicators in Israel show that the economy is firmly on the path out of the recession. Thus, initial indications from the Companies Survey show increased activity; Manpower Survey data point to some decline in unemployment; it can be seen from foreign trade data that manufacturing exports are on a rising trend; and manufacturing production and revenue data also show an improvement. The global economy is also exhibiting clearer signs of recovery from the crisis, including the increase in world trade. Uncertainty persists, however, regarding the rate of recovery of the global economy, a factor that contributes to uncertainty about Israel's economic recovery."

Looking around the world, the Bank of Israel said, "Interest rates of the leading central banks around the world are low, and are expected to remain so during the coming months, alongside a gradual exit from the non-conventional aspects of their expansionary monetary policies. An increase in the rate of interest by the Bank of Israel is likely to have some effect on the exchange rate of the shekel against other currencies."

The statement concluded, "The Bank of Israel will continue to monitor Israeli and worldwide economic and financial developments, and will use the instruments available to it to achieve its objectivesprice stability, the encouragement of employment and growth, and support for the stability of the financial system."

Published by Globes [online], Israel business news - www.globes-online.com - on December 28, 2009

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