Bank of Israel keeps interest rate at 4.75%

Stanley Fischer's decision surprises analysts, satisfies industry.

stanley fischer 298.88 (photo credit: Ariel Jerozolimski)
stanley fischer 298.88
(photo credit: Ariel Jerozolimski)
Bank of Israel Governor Stanley Fischer decided to keep the interest rate unchanged at 4.75 percent for March, the central bank said Monday, earning praise from the business sector. "The Bank of Israel's decision ... is justified and correct in the current circumstances," said Ohad Marani, head of the Manufacturers Association of Israel's economics committee and chairman of Oil Refineries Ltd., citing January's negative inflation and expectations that the year's inflation target will be met. Analysts had expected Fischer to raise the shekel rate by one-quarter or one-half of a percentage point, in suit with his pattern in past months in light of the shekel's recent depreciation and in anticipation of the US Federal Reserve's predicted move to raise the dollar interest rate to 5% by May. "We believe that the Bank decided to pause (after four interest rate hikes), while keeping the option to raise interest rates at a later meeting that will occur before the Federal Reserve is expected to raise US rate on March 28. We can speculate that the Bank doesn't want to hamper economic growth as inflation remains within the ... target for 2006," Clal Finance Batucha told clients, calling the central bank's decision "somewhat of a surprise." Federation of Israeli Chambers of Commerce President Uriel Lynn had reiterated Monday morning that US interest rate movements need not be the decisive consideration behind interest rate decisions in Israel. No less important, he said, are geopolitical stability and the potential of foreign investments. Fischer said the decision to leave the rate at 4.75% was consistent with the maintenance of the price stability target of 1%-3% inflation yearly. Considerations leading to the decision included foreign interest rates and the interest-rate gap between the United States and Israel, the likely behavior of the exchange rate, and geopolitical uncertainties, the central bank said. "While interest rates in both the United States and Europe are likely to rise in March, the Bank of Israel does not believe that an increase in the interest rate gap with the United States is needed at the present juncture to keep inflation within the target range," the central bank said. Nonetheless, "expectations of increased interest rates abroad and the continued narrowing in Israel's output gap increase the probability that interest rates in Israel will rise somewhat during the remainder of the year," the bank added. Moreover, it said, any impact of the shekel's recent depreciation will probably not last through the year, given the strength of underlying trends in capital movements coming into Israel, and as the most recent interest rate hikes continue to constitute a sufficient response to increased geopolitical uncertainty. The most recent economic data indicate continued relatively rapid growth in Israel, in line with the Bank of Israel's expectation of growth of 4.3% for 2006, the central bank said, adding that they point to a continuation of "relatively rapid" growth in the world economy as well, and that, "as expected," global interest rates have continued to rise. "The global economy is well-poised to continue to grow at a good pace, and global inflation appears to be tending downwards, leading market participants to expect the lengthy phase of United States interest-rate tightening to draw to a close relatively soon," the bank said. "Energy prices appear to be moderating, but remain vulnerable to supply disruptions." Fischer also said that the government in power following elections at the end of March is expected to "continue pursuing the responsible fiscal policy of recent years," adding that this is "essential for the continued gradual reduction of Israel's debt/GDP ratio."