Bank of Israel: Key 2.25% Interest Rate Left Unchanged

September 24, 2012

A high level of global growth risks and projected in-target Israeli CPI inflation of slightly more than 2.0% featured prominently in the Bank of Israel’s decision not to change its 2.25% benchmark interest, according to a released statement after the latest monthly policy meeting. Inflation is targeted between 1% and 3%.   Meetings in July and August had resulted in a similar decision. It’s been a year since an initial 25-basis point rate cut was implemented, and such was followed by a second reduction in January 2012 and a third this past June.  Factors that deterred any consideration of a fourth easing now were

  • A rise of on-year CPI inflation to 1.9% in August from 1.4% in July caused by supply-side strains.
  • Projected upward pressure on the CPI in the future from indirect tax hikes and high commodity prices.
  • Some concern that house prices, which are stable now, could come under renewed upward pressure.
  • A baseline projection for Israeli growth.  Today’s statement revised the expected GDP increase this year to 3.3% from 3.0% estimated previously and to 3.0% for 2013.

The key interest rate was slashed to 0.5% in the Great Recession but raised subsequently by 75 basis points each in 2009 and 2010 and 125 bps during the first five months of 2011 to a peak of 3.25%.  At 2.25% currently, the rate lies a percentage point below that peak but still exceeds the early 2009 low by 175 bps.  The next interest rate announcement will be made on October 29th.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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