Bank of Israel signals low rates

Bank of Israel signals l

By SHARON WROBEL
Local short-term borrowing costs will likely remain low over the coming months on expectations that leading central banks will maintain low interest rates and the global economic recovery will be slow, the Bank of Israel has signaled. "Despite the continued recovery of economic activity in Israel and the higher rate of growth expected in Israel and worldwide, there is uncertainty about the strength of the process," according to the minutes of the bank's October meeting to set the interest rate for November published Monday. "The global recovery is expected to be slow, as is the process of increases in interest rates." Bank of Israel Governor Stanley Fischer's decision to leave interest rates steady at 0.75 percent was supported by three senior central bank officials, while one recommended a quarter-point increase, the minutes showed. "The Bank of Israel has indicated that it is in no hurry to correct the situation," Barclays Capital said in a report published Monday. "After raising its policy rate by 25 basis points in August, the Bank of Israel held rates unchanged for two months." Barclays Capital criticized what it said was the central bank's slow monetary policy, in view of the investment bank's expectations that economic growth will be significantly positive in the second half of 2009. "The most probable outcome is that a hasty increase in rates would be necessary when the Israeli economy starts to heat up, possibly as early as mid-2010, bringing the end-2010 rate to about 3%," the report said. "We think a faster pace would be more appropriate, given our growth forecast and the upside risk we see to Israeli growth, creating higher upfront rate increases to bring Israeli monetary policy more in line with the economics." The Bank of Israel estimated that growth in the third quarter of the year was about 2.1% in annual terms, compared with 1% in the second quarter and a negative 3.3% in the first quarter, the minutes said. The central bank said it expects GDP in 2009 to remain at its 2008 level of no growth, and in 2010 to grow by 2.5%. "Leaving the interest rate unchanged would prevent the widening of the differential between interest in Israel and that abroad, and would thus reduce the supply of foreign currency on the forex market compared with the situation that would result from an increase in the interest rate," the minutes said. "This, when the policy of the Bank of Israel is to purchase foreign currency as and when necessary. The bank's forex purchases moderate the strengthening of the shekel and support the recovery trend in economic activity." Although inflation measured over the previous 12 months is in the upper part of the 1% to 3% target range, inflation from the beginning of the year, excluding the effects of increased tax rates and seasonally adjusted, is near the midpoint of the target range, the minutes said.