Israel saw rapid recovery in 2009, says central bank

Gross domestic product in the fourth quarter of 2009 is expected to show an increase of more than 4% over its level in the third quarter.

February 2, 2010 06:24
3 minute read.
Bank of Israel Governor Stanley Fischer

stanley fischer 311. (photo credit: Courtesy)

Economic developments in the last quarter of 2009 support the assessment that there was “a sharp turnaround in Israel’s economic and financial environment in the second half of the year” and that firm growth was to be found in real activity, the Bank of Israel said on Monday.

According to the central bank’s inflation report for the fourth quarter of 2009, “the upward trend in the housing price index evident since the summer of 2008 moderated in the fourth quarter of 2009 with a rise of 0.3 percent, compared with 2.3% in the third quarter. These developments support the assessment that the upward trend in housing prices is slowing.”

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The central bank added that the clear signs of the economic turnaround were also reflected in the capital market.

“Since the beginning of the recovery in financial asset prices, in March 2009, share and bond price indices have climbed steeply, and in the last quarter of 2009 returned to their record pre-crisis levels,” said the central bank. “Indeed, it seems that the real recovery is quite strong. Gross domestic product in the fourth quarter of 2009 is expected to show an increase of more than 4% over its level in the third quarter. This indicates that the growth of real activity – first signs of which could be seen in the second quarter of 2009 after sharp drops in activity in the last quarter of 2008 and the first quarter of 2009 – is becoming more firmly established.”

Preliminary assessments by the Central Bureau of Statistics, estimate that GDP increased by 0.5% in 2009, compared with earlier assessments at the beginning of 2009 predicting a decline of 1.5%. In light of strong economic indicators, the Bank of Israel recently raised its growth forecasts for 2010 to 3.5%, while the International Monetary Fund expects more moderate growth of 2.5% this year.

The inflation report for the fourth quarter of 2009 is submitted to the government, the Knesset and the public as part of the process of assessing the inflation rate in relation to the inflation target of 1% to 3% set by the government. The consumer price index increased by 0.5% in the last quarter of 2009, mainly as a result of a rise in world energy prices. Prices increased by a total of 3.9% in 2009, with relatively rapid increases in the months of April to August mainly because of government decisions to temporarily raise value-added-tax to 16.5% from 15.5% previously and the temporary increase in water prices. Not including the temporary tax and price hikes, the CPI rose by 2.8% last year.

Looking ahead to the first quarter of 2010, the Bank of Israel expects prices to increase but remain within the government’s price stability range of 1% to 3%, as upside and downside risks of deviation are balanced.

“For the next few months, inflation viewed over the previous 12 months will remain above the upper limit of the target range,” stated the report. “This assessment is based on the expected expansion in economic activity, which boosts demand, and increases in world commodity prices, which pushes up prices of factors of production, which are passed on to consumers. Against this the increases totaling 75 basis points in the Bank of Israel’s interest rate, the relatively slow pace of the global recovery, and the half-a-percentage point reduction in the rate of VAT on January 1, 2010, will have some downward effect on the CPI in the first months of the year.”

The Bank of Israel said it would continue to implement an expansionary monetary policy that seeks to support economic growth, while bringing inflation in 2010 back to the midpoint of the target price stability range by means of a gradual return of the interest rate to a “normal” level and taking into account developments in the exchange rate of the shekel. Since last August, the central bank raised its base lending rate to the current 1.25% from a record low of 0.5%. Last week the Bank of Israel left interest rates for February unchanged.

“The current conditions, with the risks balanced but with much uncertainty still prevailing, make forecasting developments difficult; in any event, decisions on the interest rate and on intervention in the foreign currency market will be taken on the basis of the latest ongoing assessments of real and financial developments,” concluded the report.

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