The Bank of Israel narrow monetary forum was unanimous in raising the interest rate for April. All members of the forum advised Governor of the Bank of Israel Stanley Fischer to raise the interest rate by 25 basis points to 1.5%, after keeping the interest rate unchanged for two months.
The Bank of Israel noted that, as it stated in the minutes of the interest rate decision for March, "decisions on the Bank of Israel interest rate are part of a gradual process of bringing the rate back to a more "normal" level intended to bring inflation into the target inflation range and to maintain it there, and to support the continued recovery in economic activity, while maintaining financial stability."
The participants in the forum mentioned the progress of real activity in Israel against the background of global developments, the inflationary environment, and changes in asset prices as factors that should affect the interest rate for April.
"Real activity continues to expand, but some indicators suggest that it is doing so at a somewhat slower pace in the last quarter of 2009, but attention was also drawn to the slower increase in exports and the risks facing the continued recovery of economic activity in light of global economic developments from the first quarter of 2010."
It added, "Nonetheless, initial findings from the Bank of Israel's Companies Survey for the first quarter of 2010 show further expansion of economic activity and expectations that this would continue in the next quarter. The current assessment is that the expected path of economic activity is consistent with a gradual upward interest-rate path."
The forum noted that 12-month inflation expectations average 2.6%, within the 1-3% inflation target. One forum member pointed to the wide gap between the current interest rate and a "normal" rate when nominal GDP is expected to grow by more than 5% in 2010.
Arguments made in favor of leaving the interest rate unchanged included the danger an increase would present for continued recovery, and the desire to prevent a widening of the gap between Israel's interest rate and the rates of major central banks, which would probably strengthen the shekel.
Published by Globes [online], Israel business news - www.globes-online.com - on April 12, 2010
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