Bank of Israel holds rates at 4.5%

Bank of Israel Governor Stanley Fischer cites less inflation risk, calmness in capital markets.

December 27, 2005 07:43
2 minute read.
stanley fischer 88

stanley fischer 88. (photo credit: )

Bank of Israel Governor Stanley Fischer made no change to the shekel interest rate Monday, holding it at 4.5 percent for January, in line with expectations. "There is no reason whatsoever to raise rates," said Shlomo Maoz, chief economist at Excellence Nessuah, who predicted that Fischer would maintain the 4.5% rate until the end of next year's first quarter. Negative inflation in November, increased tax revenues, falling yields in the market, a low government deficit, a stronger shekel, and lower inflation expectations support this prediction, he said. Leader & Co. analyst Jonathan Katz concurred that Fischer's decision to keep the interest rate at 4.5% "makes sense," noting that since late November's half percentage point interest rate hike, the shekel has strengthened more than 2% and inflation expectations have declined both within the bond market and among private forecasters. The central bank itself noted that expected inflation for the next twelve months has dropped to below 2% - the midpoint of its "price stability" target of 1%-3%; relative calm reigns in capital markets, particularly the foreign currency market; the 2005 budget deficit is expected to have dropped; and real interest rates rose somewhat, caused by the rapid expansion of economic activity and other factors. The more the decision-makers adhere to the maintenance of the current economic strategy, the greater the chances that the calm in the markets will persist, and that the creation of conditions essential for long-term growth will continue," the Bank of Israel said. "Until now the geopolitical uncertainty has not affected developments in the capital market," the BoI added. According to the central bank, private forecasters believe the interest rate will rise somewhat in the course of 2006, "due mainly to continued relatively rapid economic growth and the persistent upward trend in inflation rates and the interest rates of central banks worldwide." Fischer raised the rate to 4.5% one month ago from 4% after quarter-point hikes in October and September, bringing an end to eight straight months at the record low of 3.5%. Fischer made those moves in connection with similar moves in the dollar interest rate. The US Federal Reserve raised the dollar rate to 4.25% on December 13.

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