BoI: Interest rates to rise gradually

“Econometric models indicate that inflation measured over previous 12 months is expected to be close to the midpoint of the target range in a year’s time," bank says.

By SHARON WROBEL
April 13, 2010 04:46
2 minute read.
Bank of Israel Governor Stanley Fischer

stanley fischer 311. (photo credit: Courtesy)

 
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The Bank of Israel is expected to gradually increase interest rates over the next couple of months in an effort to rein in inflation and cool down housing prices.

“Econometric models used by the Bank indicate that inflation measured over the previous 12 months is expected to be close to the midpoint of the target range in a year’s time, alongside a gradually rising interest-rate path,” stated the minutes from the Bank of Israel report on its interest-rate decision for April. “Other forecasts... are consistent with a gradual increase in the interest rate.”

The members of the central bank’s interest-rate decision forum unanimously recommended raising April interest rates by a quarter point to 1.5 percent after rates remained unchanged the previous two months.

“After considering all the points raised in the discussion, especially the real economic activity environment, the expected development in inflation and the analysis of the development of asset prices, including house prices, the governor decided to increase the interest rate for April,” stated the minutes.

The assessment of the Bank of Israel Research Department is that inflation will moderate in 2010. However, according to the minutes, the central bank said the high degree of uncertainty regarding the rate of recovery of global economic activity, and the pace of increases in import prices and of world trade, increase the uncertainty with regard to the realization of this assessment.

In February, annual inflation eased to 3.6%, above the target range of 1%-3%. One-year-forward inflation expectations derived from the capital market remained close to 3% after publication of the February CPI. This reflects an upward trend in expectations, from about 2.5% at the beginning of 2010 and 2.8% in February.


“As was stated in the previous decision of the interest rate for March, decisions on the Bank of Israel interest rate are part of a gradual process of bringing the rate back to a more ‘normal’ level intended to bring inflation into the target inflation range and to maintain it there, and to support the continued recovery in economic activity, while maintaining financial stability,” stated the minutes. “The current assessment is that the expected path of economic activity is consistent with a gradual upward interest-rate path.”

Ron Eichel, chief economist at Meitav Investment House, expects the base lending rate to be raised to 2.5% by the end of 2010 and to 3% within a year.

Economic activity continued to grow but at a slower pace, raising uncertainty over the strength of the recovery, according to the minutes.

“Real activity continues to expand, but some indicators suggest that it is doing so at a somewhat slower pace in the first quarter than in the two previous quarters,” stated the minutes. “Activity expanded rapidly in the last quarter of 2009, but attention was also drawn to the slower increase in exports and the risks facing the continued recovery of economic activity in light of global economic developments from the first quarter of 2010.”

Nevertheless, the report noted that initial findings from the Bank of Israel Companies Survey for the first quarter of 2010 indicated that activity continued to expand, and even accelerated in some industries, compared with the rate in the previous quarter and that this would continue in the next quarter.

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