Interest rate raised to four percent

Stanley Fischer continued the increase begun in September.

By DANIEL KENNEMER
October 25, 2005 06:18
2 minute read.
stanley fischer 298.88

stanley fischer 298.88. (photo credit: Ariel Jerozolimski)

Bank of Israel Governor Stanley Fischer raised the shekel interest rate for November by one quarter of a percentage point to 4 percent Monday, confirming expectations that he would anticipate a predicted raise in the dollar rate. "The Bank of Israel's models indicate the need to raise the interest rate to maintain price stability," the central bank said in a statement, noting that inflation expectations have risen over the past two months. The Bank of Israel set 1-3% inflation as the "price stability" target for the year. Israel's Consumer Price Index rose 0.1% in September, bringing inflation to 1.9% over the previous twelve months, due mostly to an unexpected 1.1% price surge in July. Fischer had raised the shekel rate at the end of September to 3.75% from 3.5%, bringing an end to eight straight months at record-low 3.5%. The move also put the shekel rate back on par with the dollar rate, which had been raised to 3.75% six days earlier, bringing the Israeli interest rate lower than that of the US for the first time in history and contributing to the depreciation of the shekel. The US Federal Reserve is expected to raise the dollar interest rate to 4% on November 1. If Fischer had not preemptively raised the shekel rate Monday, several weeks would have passed with the shekel interest rate below that of the dollar before Fischer could bring the shekel rate back up, towards the end of November. Such a lag would have encouraged investment and capital to abandon the Israeli economy and further reduced the shekel's value, said Benny Sharvit of the Gaon Investment House. The "moderate" rise was "the right decision in the current circumstances," commented Ohad Marani of the Israel Manufacturers Association. Marani nonetheless expressed hope that Fischer will avoid more significant rises in the future, arguing that expected and actual inflation rates - together with the need to entrench economic growth and encourage employment - do not justify such raises. The central bank itself cited "growing concern worldwide regarding rising inflation due to the rise in energy and goods prices," and noted that domestic inflation could also be boosted by the shekel's recent devaluation against other currencies. The rate of short-term real interest is lower than that consistent with the rate of economic growth, which has accelerated recently, while the output gap has gradually contracted, the central bank said. October's real interest rate was 1.4%, representing the effective interest rate minus one-year inflation expectations within the capital market. Monday's rise in the interest rate is "consistent with continued economic growth," the bank concluded.



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