Bank of Israel Tightens
September 27, 2010
Interest rate decisions by the Bank of Israel are made at pre-scheduled times but by a single person, Governor Stanley Fisher. Efforts are underway to cede authority to a committee, but that hasn’t happened yet. During the world and Israeli recessions, the central bank policy interest rate was cut eight times starting in October 2008 and ending in March 2009. There was a cumulative rate drop of 375 basis points from 4.25% to 0.5%. The 0.5% trough was maintained until lat August 2009 when the Bank of Israel became the first central bank to lift rates.
Today’s announced increase of 25 basis points to 2.0% is the sixth tightening thus far. Following the initial move, the rate was also increased in November, December, March 2010, and July — each time by 25 basis points. Today’s action had been anticipated by a majority but not all analysts, and it was made in spite of an unconventional appear from Israel’s Finance Minister for Fisher not to increase the rate, lest it cause further appreciation of the Shekel. These days, everybody wants a soft currency to promote competitiveness and exports.
A statement from the Bank of Israel gave several reasons for today’s rate increase.
- Although on-year CPI inflation has receded to 1.8%, marginally under the target midpoint, expected inflation is creeping higher. A survey found people assuming consumer prices will advance 2.7% in the coming year.
- House price and house rental inflation remain excessive. Mortgage lending is also fairly lively.
- Overall Israeli GDP growth appears to have continued at a brisk pace in the early going of the third quarter. Such advanced 4.6% at an annualized rate in the second quarter and by 4.8% between 2Q09 and 2Q10. Growth is being led by housing construction, consumer spending and exports.
- Israel’s output gap is contracting, that is excess resources for production are getting reabsorbed. Policy needs be less accommodative in the future.
- While some advanced central banks are delaying monetary tightening, those countries where economic growth has taken firmer root have continuing to normalize their policies. Israel falls into this second category of nations.
The 2.0% key interest rate is only about half as much as real GDP will grow in 2010 and only marginally higher than a third of nominal GDP. That’s a pretty stimulative stance. The shekel is only about 1% stronger against the dollar than a year ago. All things considered, Fisher probably made the right choice.
Copyright Larry Greenberg 2010. All rights reserved. No secondary distribution without express permission.
Tags: Israel
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