Bank of Israel Policy Interest Rate Kept at 1.5%

May 24, 2010

Israel began the process of gradually returning to normal short-term interest rates nine months ago.  The central bank was the first to raise rates after the world recession.  While raising rates by 25 basis points in August, November, December and March 2010, the central bank paused in September, October, January, February, April and now May.  The exact path that this normalization process takes will be customized according to the performance of inflation, domestic and foreign growth, what other central banks are doing, and the strength of the Israeli shekel.   A statement from the central bank noted that

  • On-year CPI inflation of 3.0% in April after 3.2% in March and 3.6% in February is at the upper boundary of a 1-3% target range again and that expected inflation over the coming twelve months of 2.7% also lies within target.
  • The pace of Israel’s economic recovery seems to have slowed since the first quarter.
  • A “cloud” has moved over global recovery prospects from downgraded credit ratings in Greece, Spain and Portugal.
  • Future interest rate increases by other advanced-nation central banks are likely to be more delayed than assumed previously.
  • While down against the dollar since the April rate announcement, the shekel has appreciated 1.6% in trade-weighted terms.

The breadth and nature of these reasons for not lifting rates suggest the present pause will likely extend beyond midyear.  Rather uniquely, interest rate decisions in Israel have been a one-man show decided by Governor Stanley Fisher, but the central bank will be shifting to a six-person monetary policy committee in the near future.

During the recession, the Bank of Israel cut its policy rate eight times from October 2008 to March 2009 and by 375 basis points in all from 4.25% to 0.50%.  There were two reductions of 75 bps in December 2008 and January 2009 and three cuts of 50 bps.  The final two moves were by 25 bps each.

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



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