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Bank of Israel Governor Stanley Fischer raised the shekel interest rate for February by one quarter of a percentage point to 4.75 percent Monday, arguing that allowing the Israeli and US interest rates to converge would weaken the shekel and cause inflation.
"We expected this move, so we are not surprised by it," said IBI chief economist Ayelet Nir, explaining that, while macroeconomic factors alone did not support raising rates, current geopolitical uncertainty would have made it unwise to "test the Israeli currency" by allowing the shekel and dollar interest rates to converge.
The Federal Reserve is widely expected to raise the US interest rate by one quarter of a point to 4.5% on January 31.
"The current rise in the interest rate will strengthen the resilience of the economy," said Fischer, who cited both geopolitical uncertainty and "continued relatively rapid growth that is expected to lead to the closure of the output gap and thus to upward pressure on prices."
Fischer conceded that inflation expectations for one year forward are within the price stability target of 1%-3%, "but these [expectations] are based on market assessments that the interest rate will rise."
Rejecting claims of geopolitical uncertainty, Excellence Nessuah Chief Economist Shlomo Maoz argued that Israel's financial markets are "very stable" despite Ariel Sharon's illness and the Iranian threat
The Manufacturers Association of Israel and Federation of Israel Chambers of Commerce expressed their displeasure with the move.
"I hope that this does not indicate that [the Bank of Israel] has embarked on a track of automatic rate raisings," said Manufacturers economist Ohad Marani. "There are no signs on the horizon that call into question the long-term price stability target. The January [consumer price] index is expected to be negative, and the local foreign currency market is stable and relatively calm."
FICC President Uriel Lynn said the move would cost the business sector NIS 400 million yearly.
GIFT Asset Management President and CEO Norbert Brinker, however, said the hike would keep the shekel "at least steady" against the dollar, and may even help strengthen it in trading and investments.
"This was the right thing to do in terms of monetary policy, but maybe not for the growth of the economy," he said.
Nessuah's Maoz said Fischer was "automatically" raising the shekel interest rate to stay ahead of rises by the Fed, despite a host of macro-economic indicators and called the move "a very grave error."
In his statement, Fischer pledged to continue supporting policies aimed at encouraging employment and economic growth.
"Fiscal discipline constitutes an important element in the continued maintenance of economic stability," he reminded critics.