Central bank downplays local effects of global uncertainty

A Bank of Israel report said raising the minimum wage would have little to no affect on the effort to alleviate poverty.

By NADAV SHEMER
June 6, 2011 23:32
2 minute read.
New Israeli Shekels

Money Shekels bills 521. (photo credit: Courtesy)

Rising uncertainty about the pace of the global recovery should not have a significant impact on short-term domestic activity, the Bank of Israel’s management team said at its meeting last month to set the June interest rate.

Three of the four members of management who met with Bank of Israel Governor Stanley Fischer at the narrow-forum policy discussion recommended lifting the interest rate, which rose by 25 basis points to 3.25 percent, according to the minutes that were released Monday.

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But it was inflation and inflation expectations that led the discussions, along with geopolitical considerations and the usual concerns over rising house prices, that the bank said “continues to be high, although it has slowed a little” to an increase of 13.9% in the last 12 months.

Management “noted that the inflation environment is still above the upper limit of the target inflation range, the midpoint of which is 2% inflation a year,” the minutes said. “Inflation over the last 12 months was 4%, and although inflation, seasonally adjusted, was low in the last two months, it is too soon to conclude that this represents a turning point. Participants also noted that 12-month forward inflation expectations, both those derived from the capital market and those of forecasters, are still above the upper limit of the inflation target.

“The point was also made that according to the Research Department forecast, inflation is expected to decline to within the target range in the next 12 months, assuming that the interest rate rises gradually to 4.2%.

The lower-than-forecast rate of inflation in the last two months does not provide a strong enough reason to deviate from the upward-sloping path of the interest rate.”

On Sunday, a Bank of Israel report said raising the minimum wage would have little to no affect on the effort to alleviate poverty.

“In order to reduce poverty by a significant amount, improved compliance with the Minimum Wage Law is required,” the bank said.

The minimum monthly wage is set to be updated to NIS 4,100 in July 2011 and to NIS 4,300 in October 2012, leading to a reduction in the incidence of poverty of only 0.1%, but to an increase of at least NIS 427 million in public expenditure in 2011-2013, due to direct salary costs, the bank said.


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