Bank of Israel hints at interest-rate hike

The expected move is aimed at bringing inflation back into the price-stability target range of 1 percent to 3%.

Stanley Fischer Good 88 248 (photo credit: Ariel Jerozolimski)
Stanley Fischer Good 88 248
(photo credit: Ariel Jerozolimski)
The Bank of Israel on Monday indicated it will continue to moderately raise interest rates "as necessary" over the next few months to bring inflation back into the price-stability target range of 1 percent to 3%. "The Bank of Israel will stand ready to raise the interest rate as necessary to achieve the price-stability objective," according to minutes of the central bank's last rate-setting meeting released Monday. "There is uncertainty regarding continued developments of energy and food prices abroad, with the expectation being that the expected global growth slowdown will dampen this source of inflation." On June 23, the central bank raised its key base lending rate by a quarter-point to 3.75%, its second hike in as many months, after inflation accelerated to the fastest pace in five years. Inflation in the last 12 months was 5.4%, well above the target range. The next interest rate decision for August will be on July 28. Commenting on the minutes of the bank's last interest-rate decision, Rafi Gozlan, deputy head of Prisma Investment House's investment division, on Monday said the bank was expected to continue to raise interest rates at the end of the month, albeit at a more moderate pace of 25 basis points. "The protocol of the last interest-rate decision points to a need for raising the interest rate at the end of the month, but in a more moderate and controlled manner on the back of an expected growth slowdown and inflationary pressures in the domestic market into 2009," he said. "At the same time, we believe that the consumer price index during the summer months [July to September] will be higher than expected, forcing the bank to raise interest rates in the following months in a much sharper manner than it plans at the moment." In the minutes, the bank emphasized that an increase in the base lending rate was essential to prevent global energy and food price rises from spreading and affecting prices throughout the economy. "Although a significant part of inflation is attributable to the direct effect on prices in Israel of the increase in world prices - particularly of food and energy - the increase in the interest rate has an important role to play in preventing a further spillover of the prices of imported goods to domestic goods," the bank said. Nevertheless, the bank said, an expected slowdown in the world economy and in Israel during the rest of 2008 and 2009, and the appreciation of the shekel against the dollar, were supporting a return of inflation into the target range. The Bank of Israel expects inflation to stay above 4% in 2008 and not return to the target until the first half of 2009. In May, core inflation - not including food and energy prices - was 2.6%.