Bank of Israel hints at interest rate hikes

Higher energy and food prices are set to drive up inflationary pressures.

gas station 88 224 (photo credit: Ariel Jerozolimski)
gas station 88 224
(photo credit: Ariel Jerozolimski)
The Bank of Israel is expected to raise the base lending rate for June by a moderate 0.25 percentage points at the end of the month as higher energy and food prices are set to drive up inflationary pressures. "The central bank continues to view rising energy and food prices as a fundamental inflationary factor," Rafi Gozlan, the head of Prisma Investment House's macroeconomic research division, said Monday. "At the same time, the bank expects the effects of a slowdown in the US economy to continue to curb local activity and inflation, but rising commodity prices and a declining real rate of interest [the Bank of Israel's interest rate minus inflation expectations] will still lead the bank to cut interest rates by 0.25 percent at the end of the month." According to the April 28 minutes of the central bank's last meeting to decide interest rates, which were released Monday, Bank of Israel officials were concerned about the "contradictory forces" that affect inflation, which led the central bank's management to recommend keeping the interest unchanged at 3.25%. "The increase in food prices was higher than expected, and would apparently continue to contribute to inflation," the protocol of the meeting said. "Although inflation in the last three months was consistent with the inflation target, the March index was higher than expected. This, together with increases in food and energy prices, pushed inflation expectations and forecasts for the next 12 months up to about 3%, the upper limit of the target," it said. Inflation unexpectedly accelerated for the ninth consecutive month in March when prices rose 0.3% as a stronger shekel failed to offset the impact of higher commodities prices. In the last 12 months the consumer price index rose 3.7% above the government's inflation target of 1% to 3%, despite the strengthening of the shekel against the dollar by about 13% during that period, the Bank of Israel said. The consumer price index, excluding the energy and food components, which constitutes 79% of the overall index, rose by 1.8% over the past 12 months. The participants at the meeting raised the possibility of the shekel weakening against the dollar during the year. "The current account will change from a $5 billion surplus in 2007 to a smaller one in 2008, or even a small deficit," according to the minutes of the meeting. "This fact, together with the bank's purchases of foreign currency, could weaken the shekel and counter the strengthening trend evident in the last few months. If the shekel does weaken, the exchange rate will no longer offset the forces exerting inflationary pressure, as it did in the 2007 and the first quarter of 2008."