Bank of Israel: No Policy Change This Month

April 26, 2010

Contrary to the view of some analysts, the Bank of Israel’s short-term borrowing rate was not raised today by a further 25 basis points but rather left steady at 1.50%.  Only Australia’s five rate increases surpass Israel’s four.  Those increases, like Australia’s, were all by 25 basis points and were implemented last August, November, December and March.  A statement from Israeli monetary officials called policy “expansionary” and in a process of “gradual” normalization.  Since rates were lifted only a month ago, an increase this month would not be consistent with a “gradual” path.  None of the major determinant of the timing of future increases required a move now, either.  Consumer prices rose 3.2% over the twelve months to March but at a slower underlying pace in 1Q10.  Inflation is likely to move below the Bank’s target range mid-point later in 2010, and indications of expected inflation are already down to 2.7% and receding.  Israeli growth is better entrenched but not sizzling.  GDP rose 2.4% between 4Q08 and 4Q09 and is unlikely to reach 3.5% this year.  Global growth is still subject to high uncertainty and some risk.  The shekel continued to rise in the past month, climbing 0.9% against the euro and 0.2% versus the dollar.  Other central bank interest rates continue to be low.  Presumably that suggests that more aggressive rate tightening in Israel could cause a steeper appreciation of the exchange rate than Israeli officials would like to see.  Israel’s prior peak interest rate level was at 4.25% prior to 375 basis points of easing implemented from October 2008 to March 2009.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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