(photo credit: Ariel Jerozolimski [file])
Bank of Israel Governor Stanley Fischer held October interest rates steady despite opposition from a majority of bank officials partly because of uncertainty regarding the strength of the local recovery, according to minutes of the meeting where the decision was made.
After becoming the first head of a central bank to raise interest rates, by a quarter of a point to 0.75 percent in September, Fischer left interest rates unchanged for October "to balance the need to continue to support the recovery of economic activity with the need to return inflation, which is above target range, to within the price-stability target range, while preserving financial stability."
He cautioned that although expectation of faster growth in Israel and world-wide suggested that the current environment is one of recovery from the recession, there was uncertainty regarding the strength of the recovery in Israel, in part because of questions regarding the recovery in the global economy.
The central bank's minutes from the interest-rate discussion on September 24 showed that three out of four central bank officials voted in favor of increasing interest rates by 0.25%, and one member recommended to leave the rates unchanged. The interest-rate decision is made solely by Fischer, after taking into account the views of the members of the forum.
"The three participants who recommended an increase in the interest rate noted that inflation over the previous 12 months was slightly above the upper limit of the target range, and that the interest rate was low, given that the economy was on a recovery path, even if there was uncertainty regarding the strength of the recovery," according to the minutes. "The very expansionary monetary policy currently in place was taken against the background of the environment of a serious crisis and concern that the recession would be a severe and long one.
"In light of the current environment of economic activity, there was room to increase the interest rate again, following the previous month's increase."
Fischer argued that inflation from the beginning of the year, excluding the effects of recently increased tax rates, was around the midpoint of the target range of 1% and 3%.
"Inflation expectations for the next 12 months, both those of the forecasters and those derived from the capital market, are also around the midpoint of the target range," the bank reported. "The rate of inflation is expected to return to within the target range when the short-term effects of the increases in taxation have run their course."
The member of the forum who recommended that Fischer leave the interest rate steady said that would prevent a widening of the differential between the interest rate in Israel and rates abroad, which would serve to reduce the supply of foreign currency on the forex market, at a time when the Bank of Israel is buying foreign currency as necessary.
"The central bank's foreign currency purchases act to moderate the strengthening of the shekel and support the recovery trend of economic activity," the report said.
"The publication of the Bank of Israel's composite state-of-the economy index for August, which rose 1.3% for a fourth consecutive month, underscored the country's ongoing recovery from the recession," economists at Direct Investment House said in a report Monday. "On this basis, the central bank should have raised interest rates already at the end of September, but the economy's vast exposure to globalization and what is happening around the world prevented a hike."
Direct Investment House expects interest rates to be raised by 0.25% to 1% by the end of the year.