Governor of the Bank of Israel Prof. Stanley Fischer's decision to raise the interest rate by 25 basis points to 1.25% is another step toward normalcy in the Israeli economy, at least as Fischer himself defines it. In the Bank of Israel's press release accompanying yesterday's rate hike, Fischer did not conceal that it is necessary to incrementally adjust the expansionist monetary policy and to revert to the central bank's traditional job.
Enough has already been said that Fischer is a scout ahead of the main body of the industrialized world's central bankers. He was the first to raise the interest rate in the second half of 2009, and he was the first to speak openly about the need to return to the central bank's main job.
Part of Fischer's conduct is derived from his special stature in the international arena. He is one of the most esteemed men in the community of central bankers and ministers of finance, and his actions reflect his opinions about the need to quickly realize a strategy for putting behind expansionist fiscal and monetary policies.
There is also another aspect to Fischer's decision: the domestic scene. Israel is the first country and the Bank of Israel is the first central bank to end its policy of capital injection into the economy, and Israel is also one of the industrialized countries where economic growth has resumed. Israel is also the first country where consumer confidence has recovered from the crisis and returned to boom-time levels, as reflected in the Consumer Confidence Index, compiled by Globes Research and Kesselman and Kesselman - PricewaterhouseCoopers Israel.
Israel is also the country where the conditions for real estate bubble have emerged, in total contrast to what is happening in nearly every other industrialized country.
In fact, the conditions of the Israeli economy at the end of 2009 facilitate an interest rate, both compared with the domestic conditions of a few months ago, and compared with international developments. Domestically, Fischer sees rising demand, expanding GDP, and a gradual fall in unemployment. In addition, and possibly most of all, he sees the dollar strengthening in international markets, which gives him more room to maneuver with the interest rate. As far as he is concerned, these conditions make it possible for him to raise the interest rate with little risk of harming the economy.
As for what happens next, the Bank of Israel's press release made it clear that Fischer will not be satisfied until inflation is back within the government's 1-3% price stability target. Fischer has returned to what he set out to do when he began his term: to achieve an optimal inflation rate of 2%, the middle of the inflation target range.
It can be assumed that as far as he is concerned, it is possible to make more interest rate hikes in the future, since an interest rate of 1.25% is probably not enough to rein in inflation to the desired level. So long as the other conditions - growth, demand, and the exchange rate - allow it, Fischer will continue his steps to normalcy.
That is Stanley Fischer's message not only to Israel, but to almost every other central banker: when the opportunity comes to leave behind emergency measures - seize it.
Published by Globes [online], Israel business news - www.globes-online.com - on December 29, 2009
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