Fischer lifts rates to 5.25% in 'close call'

The strengthening of the shekel against the dollar in recent weeks, attributed to both domestic and global factors, "is likely to provide a moderating force on inflationary pressures," Fischer said in his statement.

April 25, 2006 08:10
2 minute read.
stanley fischer 88

stanley fischer 88. (photo credit: )


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Bank of Israel Governor Stanley Fischer raised the shekel interest rate for May by one-quarter of a percentage point to 5.25 percent, his sixth rate hike since September, the central bank said Monday evening. "This was a very close call; it could have gone either way," commented Leader Capital Markets analyst Jonathan Katz. "What is clear is that Fischer is still in a cycle of monetary tightening, meaning that rates will continue to go up through 2006," he said, adding that strong overall economic growth and falling unemployment make lifting rates to up to 6% "reasonable" by the year's end. "Several factors support monetary tightening," including a relatively high first-quarter inflation index, signs that core inflation is on the rise and an expected rate hike by the US Federal Reserve on May 10, Katz said, adding that Fischer is probably also concerned about increased budgetary spending under the incoming government. Nonetheless, it would not have hurt to wait another month to raise the interest rate, Katz said. Fischer himself cited domestic inflationary pressures (strong economic growth, expanded demand and exhaustion of surplus production capacity) and rising oil prices globally as justification for the rate hike, in addition to an above-target inflation rate of 3.6% for the past 12 months. The strengthening of the shekel against the dollar in recent weeks, attributed to both domestic and global factors, "is likely to provide a moderating force on inflationary pressures," Fischer said in his statement. Excellence Nessuah chief economist Shlomo Maoz called the rate raise "pathetic," adding that rate hikes were unjustified - in a period of strong inflows of foreign investment and surplus in the current account - and reflect only Fischer's desire to keep up with developments in the US interest rate. Together with the rising oil price globally and government plans to raise the minimum wage to $1,000 monthly, the rate hikes will lead to weaker economic growth and thousands of layoffs by 2007, Maoz charged. Rate hikes are particular damaging to traditional industry, which is more sensitive to exchange and interest rates, and poorer Israelis, who have to make payments on overdrafts, he said. Using domestic monetary policy would have no effect on inflation, which was mostly the result of high oil prices globally, Maoz said, adding that the rate hikes help boost the shekel while hurting exports. Katz, on the other hand, said energy prices were not the primary cause of first-quarter inflation, which he believes was more reflective of core domestic inflation pressures. He thinks this may change, however, in the months ahead if very high fuel prices persist. Additionally, Katz said the rebounding shekel was not the reason for the disappointing first quarter export figures, arguing that "two-percent movement of the shekel up or down is not what makes or breaks Israeli exports. It's much more of a niche sector."

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