Bank of Israel Rate Lifted 25 Basis Points

March 29, 2010

The Bank of Israel raised its key borrowing rate to 1.5% from 1.25% as expected.  In doing so, Israel joined  Australia as the only economies with four rate hikes so far, and all four moves by each central bank have been by increments of 25 basis points.  Today’s move, however, was the first one in Israel in three months, the three prior moves being done last August, November and December.  The backdrop to the latest action are economic recovery — GDP advanced 4.4% annualized last quarter and by 1.9% from 4Q08 — and expected CPI inflation of 2.6%, near the 3% ceiling of its target range. Actual CPI inflation stands at 3.6%, but a half-percentage point of that rate reflects government taxation.

 The Bank of Israel’s statement policy guidance language reads similarly to December’s when rates were previously raised.  With the key rate at 1.5%, policy remains expansionary according to central bank officials, and the four increases taken so far are part of a normalizing process whose future timing will be determined by Israeli inflation, domestic growth, foreign growth, what other central banks do, and how the shekel behaves.  The currency firmed slightly against the dollar and euro since the previous policy meeting in February and is around 11% stronger against the U.S. currency than a year ago.

The Bank of Israel rate announcement was made atypically on Sunday.  Domestic financial markets are closed for Pesach until Wednesday.

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



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