Bank of Israel lifts interest rate to 5%

Move was anticipated but still angers business sector.

By DANIEL KENNEMER
March 29, 2006 07:02
2 minute read.

 
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Bank of Israel Governor Stanley Fischer raised the shekel interest rate by one-quarter of a percentage point to 5% for April to help keep inflation within the central bank's target range. "This is exactly what everyone was expecting," said Leader Capital Markets analyst Jonathan Katz. "The market is gradually learning to predict what is important in Fischer's mind. This is an improvement," he said. The central bank is expected to raise rates to around 5.5% by mid-year, Katz added. "Monthly adjustments have occasionally been surprising, but the long-term forecast has not radically changed," he said. Fischer explained that economic data indicate relatively fast growth that was expected to continue "against the backdrop of relatively fast growth in the world economy and expectations that the government's macro-economic strategy would continue." February's combined index for the state of the economy rose 0.3% and the month's consumer price index rose a higher than expected 0.6%, bringing inflation to 3.1% over the past 12 months, "somewhat above the inflation target's upper limit," the governor noted. Inflation over the next 12 months is expected to hit the mid-range of the 1%-3% price stability target, but only if the interest rate continues to rise, Fischer said, citing capital market and economic forecasts. Interest rates in key markets abroad continue to edge up, Fischer said, citing the Central European Bank's quarter-point hike earlier this month and expectations for a similar raise Wednesday by the US Federal Reserve. The Fed raise would bring the target dollar interest rate to 4.75%. "The Bank of Israel sees the interest rate gap with foreign [currencies] as one of the important factors behind developments in the exchange rate, which in turn influences inflationary pressures. As such, there is a greater need to raise the interest rate this month. However, the Bank of Israel does not believe that a fixed interest rate gap [against foreign currencies] is needed to meet the inflation target," Fischer said. The Manufacturers Association of Israel and the Federation of Israel Chambers of Commerce both protested Fischer's decision. "I hope that this does not signal the beginning of a trend of automatic hikes in the coming months," said Manufacturers economic committee chairman Ohad Marani, arguing that low inflation expectations and the stable shekel do not justify the raise. FICC President Uriel Lynn called on the bank to "make it clear that [monetary] policy is to not raise the interest rate and not to continue raising the interest rate as a permanent policy." Before the decision, Excellence Nessuah chief economist Shlomo Maoz said the interest rate did not need to be raised, given low inflation expectations and the absence of significant fiscal deficit and wage rises.

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