The Bank of Israel unexpectedly raised its benchmark lending rate by a quarter of a percentage point Monday, saying economic growth and rising global commodities prices risk sparking inflation.
Stanley Fischer
Photo: Ariel Jerozolimski
The rate the bank charges commercial lenders will be 3.75 percent as of July 26, the central bank said. Twelve out of 16 economists surveyed by Bloomberg had forecast no change while two expected an increase of a quarter point.
Rapid "economic growth and expectations that it will continue" lay behind the increase, the bank said. "Recently, expectations have increased for higher worldwide inflation, especially for energy and basic food products, which will affect prices for Israeli imports."
Israel's economy grew an annual 6.3% in the first quarter as unemployment dropped to its lowest in a decade. The central bank said on June 27 that the economy will probably expand 5.1% this year, its fifth year of expansion.
The Bank of Israel, led by Governor Stanley Fischer, lowered the base rate a total of 2 percentage points beginning last October to 3.5% in a bid to weaken the shekel and steer inflation up to the government's target range of between 1% and 3%.
Consumer prices had been falling since the fourth quarter of 2006 because the strong shekel lowered prices for homes, which are customarily linked to the US currency.
The Israeli currency has shed as much as 9% of its value against the dollar since the middle of May when it began retreating from a 9 1/2-year high.
"The decision isn't a good one," said Shlomo Maoz, the chief economist at Excellence Nessuah Securities & Investments Ltd. "In the end it will lead to appreciation of the shekel, which isn't good for the economy or for exports."
The shekel was trading at 4.2043 to the dollar at 6:50 p.m. local time, strengthening from as much as 4.2500 earlier in the day.
The decision was announced after the Tel Aviv Stock Exchange closed. Trading won't resume until July 25 because of the Tisha Be'Av holiday Tuesday. The yield on the government's Shahar bond due in 2016, which rose to as much as 5.79% on July 16, closed at 5.63% Monday before the decision.
Wages will probably increase 3% this year after a 2% rise in 2006, as gross domestic product climbs 5.1%, matching the 2006 pace, the Bank of Israel said in the June 27 report. Israel's current-account surplus will reach $6.6 billion, falling from a record $8b. last year, it said.
Still, Bank Hapoalim Ltd. estimates inflation will probably reach 2.1% over the next 12 months, close to the mid-point of the government's target range. The Bank of Israel on Monday cited its survey of forecasters, which expects a 2.7% inflation rate within the next 12 months.
Maoz described the decision to raise interest rates as a "panic" reaction to the unexpectedly high June consumer-price report. He said higher Israeli rates won't offset the inflationary impact of higher world commodities prices.
(Bloomberg)
