The Bank of Israel on Monday raised the benchmark interest rate for a third time since the global economy began to recover as growth accelerated and inflation exceeded the government's target range.
Bank of Israel Governor Stanley Fischer increased the lending rate by a quarter of a percentage point to 1.25 percent, the central bank said Monday. Seven of 16 economists surveyed by Bloomberg had predicted the increase, while nine expected no change.
"The decision to increase the interest rate for January was taken in light of the inflation environment in Israel, which is in the upper part of the price-stability range, against the background of growth that is becoming more firmly based," the bank said in a statement.
Fischer in August became the first central banker to boost the key rate since the beginning of the global economic recovery and raised it for a second time last month. Inflation accelerated to 3.8% in November, its fastest pace in almost a year, breaching the government's 1% to 3% target range for the first time in three months.
The benchmark Mimshal Shiklit note due February 2017 fell NIS 0.19 to NIS 108.3 at the close in Tel Aviv before the decision. The yield on the 5.5% security rose three basis points to 4.87%. The shekel strengthened to 3.7825 to the dollar as of 6:50 p.m. The currency was at 3.7857 just before the decision.
"[Fischer] is trying to bring inflationary expectations down a bit," Ron Eichel, chief economist at Tel Aviv-based Meitav Securities & Investments, said Monday in a telephone interview. "It's hard to say if he will raise rates again next month, but the direction is clear: rates are going to go up further."
Eichel, who predicted the rate increase, said he expects the benchmark rate to reach 2.5% by the end of 2010.
Gross domestic product expanded an annualized 2.2% in the third quarter, the fastest pace in more than a year.
The economy might grow quicker than the Bank of Israel's 2.5% forecast next year, Finance Minister Yuval Steinitz said Thursday. Growth would likely return to its 2003-2008 level of about 5% by the end of next year, he said.
The economy returned to growth in the second quarter this year, after contracting in the previous two quarters as the global financial crisis dried up Israel's main export markets.