Bank of Israel Raised Policy Rate to 1.0% from 0.75%

November 23, 2009

This 25-basis point tightening had not been anticipated and followed no rate change at the September or October central bank meetings.  However, this was Israel’s second 25-bp rate hike of the cycle, matching the Reserve Bank of Australia’s two 25-bp increases on October 6 and November 3.   Norway’s central bank has lifted its policy rate once.  Previously, Israel’s central bank had slashed its policy rate from 4.25% to 0.5% in eight moves, starting with two cuts in October 2008 totaling 75 bps and then doing two more cuts in November (a year ago) totaling 100 bps, a cut of 75 bps in December and cuts of 25 bps each in February and March of this year.

The statement released to explain today’s action cited upwardly creeping expected inflation and characterized the step as insurance against that development.  The statement also speaks of a broad recovery now underway by of uncertain strength.  Although the Bank of Israel is one of very few central banks to raise rates so far, while others like Hungary’s are still cutting, the statement places today’s action in the context of a shift by other central banks.

The Fed and the ECB are starting to take steps indicating a gradual withdrawal from the non-conventional aspects of monetary policy. In some countries where the recovery has become more firmly established, interest rates have been increased.

The Bank of Israel will undoubtedly tighten further but didn’t leave clues to the timing of its third move.

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


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