Bank of Israel Lifts Key Interest Rate for Second Time in 2010 and Fifth Time Since August 2009

July 26, 2010

Somewhat unexpectedly, Israel’s policy rate was raised by 25 basis points to 1.75%.  The prior four increases, all by 25 bps, were implemented in August, November, and December of 2009, as well as March of this year.  Like those moves, Today’s statement characterized the most recent increase as part of a normalizing process, but the timing of the move appears to be associated with asset price inflation (stocks and home prices both show on-year increases of about 20%).  Indications that expected inflation over the coming twelve months has moved toward the upper part of the target band even though actual inflation of 2.4% is closer to the range mid-point was another precipitating factor for tightening now.   A third reason for moving at this time was some recent trade-weighted currency depreciation.  The statement does observe, however, that economic data have been mixed, sufficiently so to reiterate that the baseline view remains that GDP will rise and that excess capacity will decline gradually.  Those remarks suggest another pause before further tightening is done.

The Bank of Israel was the very first central bank to implement any rate increase following the world recession, and the cumulative 125 basis points of tightening is exceeded only by Brazil’s 200 basis points and Australia’s 150 basis points.  Elsewhere, central bank rates have advanced by 100 bps in Chile, 75 bps in Norway, India, Peru, and Malaysia, 50 bps in Canada, 25 bps in Thailand, South Korea, Sweden, and New Zealand and 12.5 bps in Taiwan.  Singapore and China have also tightened monetary policy, the former by revaluing the currency in April and the latter by imposing curbs on bank lending and corporate investment.

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



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