Bank of Israel raises interest rate to 1.75%

Governor of the Bank of Israel Prof. Stanley Fischer has raised the interest rate for August by 25 basis points to 1.75%. The Bank of Israel had kept the interest rate at 1.5% since May. The decision to raise the interest rate was not a complete surprise but most analysts had expected Fischer to leave the rate unchanged due to the weaker macroeconomic figures over the past month.

In explaining the interest rate hike,The Bank of Israel stressed fast-rising real estate prices, " Housing prices and the housing index (rents) are continuing to increase rapidly, together with a rapid expansion of housing credit."

The Bank of Israel said, "The decision to increase the interest rate for August to 1.75% is consistent with the gradual process of returning the interest rate to a more 'normal' level, intended to position inflation firmly within the target range, and to contribute to the further recovery of economic activity, while supporting financial stability. The path of the interest rate will be determined in accordance with the inflation environment, the entrenchment of growth in Israel and globally, the monetary policies of the leading central banks, and in light of developments in the exchange rates of the shekel. At the current level of the interest rate, monetary policy continues to be expansionary."

The Bank of Israel expressed concern over inflation. The bank's statement said, "Inflation forecasts of the Bank of Israel and of the private forecasters and expectations derived from the capital market for one year ahead are around the upper limit of the target inflation range. The Bank of Israel's assessment of inflation in the next twelve months was revised upwards in light of the weakness of the shekel (in terms of the effective exchange rate) in the last month, the continued increase in house prices, and the planned hikes in indirect taxes."

The Bank of Israel continued, "Data on real activity that became available this month present a mixed picture. Some indicate continued expansion and a further decline in unemployment, while others point to a slowdown in activity, and particularly in exports. An analysis of the whole range of data leads to the assessment that positive growth will continue in accordance with the Bank's previous forecasts, with a gradual contraction of the output gap."

The Bank of Israel statement concluded, "Interest rates of the central banks of the major advanced economies are at very low levels, and in light of recent developments are expected to remain so for some considerable time. That said, central banks in several countries that are already growing relatively rapidly continued with the process of increasing their interest rates last month too, and are expected to continue to do so in the near."

Published by Globes, Israel business news - www.globes-online.com - on July 26, 2010

Bank of Israel raises interest rate to 1.75%

Stanley Fischer raised the interest rate by 25 basis points, after keeping it unchanged for the past three months.