Fischer set to raise interest rate to 4%

Bank of Israel Governor expected to raise the shekel rate another quarter percentage point Mon.

October 24, 2005 03:31
2 minute read.


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Bank of Israel Governor Stanley Fischer is expected to raise the shekel interest rate another quarter percentage point to 4% Monday afternoon, analysts said Sunday. "The upcoming US interest rate will only be announced in another few weeks, so the question is whether Fischer will raise rates before they are raised in the US, or wait," said Benny Sharvit of the Gaon Investment House. The Bank of Israel learned from the shekel's depreciation when the shekel rate found itself beneath the dollar rate between September 20 and September 26, and would seek to prevent a repeat by pre-emptively raising the rate Monday, ahead of the US, Sharvit argued. The US Federal Reserve is expected to raise the benchmark rate another 0.25 percentage points at its next meeting on November 1. Following several weeks of parity, the Fed raised the benchmark US interest rate from 3.5% to 3.75% on September 20, contributing to factors leading the Bank of Israel to raise its rate to 3.75% after keeping it at a record low of 3.5% for the previous eight months. "The dollar has risen quite enough against the shekel even without the interest rate. [Fischer] won't take a chance. He'll raise the interest rate here first to be ready," Sharvit said. By ensuring that the shekel rate stays above or equal to the dollar rate, Fischer is ensuring that the shekel maintains its value against the dollar, by keeping capital and investors in the Israeli market, he said. "The Governor knows he's walking a tightrope and must not lose control, and the very fact that a large part of players in the local capital market are talking about a raising of rates almost forces him not to disappoint them," said GIFT Asset Management. "The decision is simple: the damage caused to the economy by a 0.25% raise in the interest rate could be much smaller than the damage liable to be caused by losing control over the economy's inflationary expectations," GIFT said. Ayelet Nir, chief economist at the IBI Group investment house, noted that the central bank's five reasons given for raising the interest rate last month hold true now as well. Inflation expectations are on the rise, the shekel has been losing ground, the US is expected to continue raising its benchmark rate, fuel prices are high, and political uncertainty remains. All of these factors taken together support a raise of the interest rate according to the central bank's previous decision, she said. "There has been no improvement, but rather a certain deterioration even. There's no chance that the interest rate will not be raised," she said. Within a year, the Bank of Israel is expected to raise the shekel interest rate to 4.75%- 5%, in line with the trend set by the Fed, Leader & Co. said Monday.

More about:Stanley Fischer

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