Bank of Israel Policy Rate Held Steady at 0.75%

October 26, 2009

Lower-than-anticipated inflation last month, well-anchored expected inflation, and high unemployment persuaded Israeli monetary officials not to hike their key benchmark interest rate for a second time.  An initial increase was made August 24, making the Bank of Israel the first central bank to raise rates after having implemented a series of deep reductions.  In Israel’s case, there had been eight reduction between October 2008 and March 2009, which lowered the interest rate 375 basis points in all from a peak of 4.25% to 0.5%.Early this month, the Reserve Bank of Australia become the second central bank to tighten, following the Bank of Israel’s cue.  Analysts had been split over whether a second Israeli rate hike might occur today in light of minutes from the prior September meeting that showed some policymakers at the time in favor of tightening at that time.

A statement released today by the Bank of Israel stressed low inflation.  Consumer prices fell 0.3% last month instead of holding flat as assumed.  Inflation adjusted to remove the impact of higher indirect taxation is at 1.9%, marginally under target.  An output gap, which is expected to persist in 2010, points to a further reduction of inflation.  Meanwhile, unemployment is higher than officials would like, and the shekel’s 15% rise since April could dampen exports, while also fostering disinflation.  Low inflation puts the central bank in a position to run a policy that helps to promote economic recovery and an eventual improvement in the labor market.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.


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