Fischer raises interest rate to 4.5 percent

Bank of Israel gov. cites need to keep inflation within gov't's price stability target.

stanley fischer 298.88 (photo credit: Ariel Jerozolimski)
stanley fischer 298.88
(photo credit: Ariel Jerozolimski)
Bank of Israel Governor Stanley Fischer raised the shekel interest rate for December by one half of a percentage point to 4.5 percent Monday, citing a need to keep inflation within the government's price stability target for the year. "This seems exaggerated at the moment," commented Prof. Rafi Melnick, dean of the Lauder School of Government at the Interdisciplinary Center in Herzliya and formerly of the Bank of Israel, who had anticipated a quarter-percentage-point rise. Fischer is in fact raising the rate faster than before, having raised it to 4% from 3.75% at the end of October, and to 3.75% from 3.5% at the end of September, bringing an end to eight straight months at the record low, in reaction to similar moves in the dollar interest rate. Melnick said that current anticipation of the next raise by the US Federal Reserve would only justify raising the shekel rate by 0.25 point. "The bank is apparently wary of an impending burst of inflation, which I do not foresee on the horizon," he said. Ran Israeli, macroeconomist and strategist at Clal Finances Batucha said earlier that raising the rate by 0.5 point would show "panic." "It's too fast. Fischer is putting his foot on the breaks too soon in terms of monetary policy. Unemployment is still relatively high, and I don't think we are in a really overheated inflationary environment," said Leader & Co. analyst Jonathan Katz. The central bank explained that the rate of inflation had risen over the past few months, and was expected to approach the upper limit of its 1% to 3% target for the year before the end of 2005, perhaps exceeding it in the first months of 2006. The Consumer Price Index indeed rose 0.8% in October, bringing total inflation in the first ten months of the year to 2.7%. "The Bank of Israel's interest policy, including the current decision, is aimed at bringing inflation back to the midpoint of the target range, but this process is expected to take several months," the bank said. Prices were being pushed up by anticipation related to the depreciation of the shekel against the dollar, continued rapid economic growth, rising inflation world wide, and political uncertainty, the central bank said. Calling the bank's explanation for the raise "simplistic," Katz stressed that "half of the current cycle of inflation is due to the sharp rise in oil prices. This is a one-time event with a direct impact, and not necessarily a factor that will continue in the future." Instead of looking at the core CPI, excluding fuel prices, Fischer is concentrating on growth in the overall inflation rate, Katz said, " and as a result he's raising rates too quickly, which may lead to slower than desired growth in 2006." Melnick, however, took comfort in the current fortitude of the economy as a whole, and did not expect that the central bank's decision to raise rates to such a level would impede the "current surge" of growth, "even if it's not what I would do." The Manufacturers Association in Israel said that Fischer's decision was "correct in the current circumstances," but added that due to the economy's strength and what it called low inflation, "there is no reason to enter an automatic track of rate risings."