BoI leaves May interest rate unchanged at 3%

Stanley Fischer defies expectations from analysts that he would raise rates by at least a quarter-point.

Stanley Fischer 311 (photo credit: Bloomberg)
Stanley Fischer 311
(photo credit: Bloomberg)
The benchmark interest rate will remain unchanged in May at 3 percent, Bank of Israel Governor Stanley Fischer announced on Sunday, defying expectations from some analysts that he would raise rates by at least a quarter-point.
The central bank said that its decision was “consistent with the process of returning the interest rate to a more normal range intended to position inflation firmly within the target range, and to support the further recovery of economic activity, while maintaining financial stability.”
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Explaining the main considerations behind its decision, the bank said that the recent appreciation of the shekel and previous increases in the interest rate were expected to moderate the rate of inflation in the coming months. It added that indicators of economic activity published this month supported the assessment that the rapid expansion of activity and demand continued in the first quarter.
The statement also said that the bank would continue to keep a close watch on developments in the assets market, especially in the housing market. The bank recently revealed that it was considering macroprudential measures to reduce risks in the mortgage market. A further announcement is expected soon.
Clal Finance chief economist Amir Kahanavich said that the bank was still being led by the rising house prices and by the expectation that interest rates would rise in the United States.
“The Bank of Israel has not imposed new restrictions on mortgages but as long as this issue hangs in the air it has influence,” Kahanavich said.
Shraga Brosh, president of the Manufacturers Association, praised the bank’s decision. “The rate increase of the previous month was an understandable but dangerous step, as we had warned that it would bring further harm to the competitiveness of Israeli exporters,” Brosh said.
“We are pleased that the governor has decided to keep the rate at its current level in order not to further weaken the dollar, but we still expect a fiscal or monetary solution to the exchange rate problem. Exporters don’t know how to deal with these rates, and retreats in exports will influence all market activities,” he said.
This month’s decision to keep interest rates steady comes after the bank raised the rate by half a percentage point in its decision for April. The minutes of the discussions prior to the May interest rate decision will be published on May 9.