BoI holds interest rate as inflation slows

“The decision to hold the interest rate for September at 1.75 percent is consistent with the gradual process of returning the interest rate to a more ‘normal’ level."

stanley fischer 311 (photo credit: Courtesy)
stanley fischer 311
(photo credit: Courtesy)
Despite strong local growth data, the Bank of Israel left interest rates for September unchanged, as inflation fell below the mid-point of the target range and concerns over a slowdown in the pace of the global economic recovery are growing.
“The decision to hold the interest rate for September at 1.75 percent is consistent with the gradual process of returning the interest rate to a more ‘normal’ level, intended to position inflation firmly within the target range, and to support the further recovery of economic activity, while maintaining financial stability,” stated the central bank.
The central bank said that one of the main reasons behind the decision was that inflation in the last twelve months slowed down to 1.8%, below the midpoint of the target inflation range of between 1% and 3%, despite the rapid rise of 5.6% in the housing index in that period.
“The Bank of Israel decided to keep its policy rate on hold, as we and the consensus expected,” said Daniel Hewitt, an analyst at Barclays Capital. “The bank is in the middle of a long gradual rate-hike cycle, increasing rates about every second or third meeting.”
Governor of the Bank of Israel Prof. Stanley Fischer has raised the key interest rate by 1.25 percentage points in the past 12 months as the economy recovers from the impact of the worst global recession since the Great Depression.
“Most indicators of real economic activity published this month point to continued expansion,” stated the central bank. “Nevertheless, uncertainty persists regarding the rate of growth in Israel. This is due mainly to the high degree of uncertainty prevailing in the global economy, reflected in downward adjustments of growth rate forecasts by analysts and international organizations.”
In the second quarter of the year, the economy grew at a suprising 4.7% versus 3.6% in the previous quarter, due to strong domestic demand and steady net exports.
“The Bank of Israel will to continue to ‘normalize’ monetary policy at a gradual pace in the coming months, in our view,” said Ivailo Vesselinov, an analyst at Credit Suisse.
“Notwithstanding the latest encouraging economic data, however, it should be noted that inflation is likely to remain subdued in the coming months and our forecast envisages that it will remain on target in the coming quarters. Moreover, the central bank is also likely to harbor ongoing concerns about a slowdown in pace of the global economic recovery and the potential impact on demand for Israel’s exports.

“Given widespread expectations that the US Fed and the ECB will keep their policy rates on hold for a prolonged period, we maintain our view that BoI Governor Fischer is unlikely to rush into tightening monetary policy aggressively,” Vesselinov concluded.
Credit Suisse continues to envisage a gradual “normalization” process to bring real rates into positive territory in the medium term, with two additional 25 basis points rate hikes later in the second half, taking the benchmark rate to 2.25% by the end of 2010.
The rebound in the economy has prompted Israel’s benchmark TA-25 stock index to gain 18% in the past year, led by Avner Oil & Gas Ltd., a partner in the Tamar gas field off Israel’s coast.
Fischer, who currently has sole responsibility for setting rates, was appointed for a second term as governor on March 17. He is in the process of implementing a new law that calls for the creation of a six-member Monetary Policy Committee to make rate decisions.
Bloomberg contributed to this report.