Fischer set to hold rate steady at 5.5%

Decision is mainly due to shekel's strength and expected decline of economic growth caused by war.

stanley fischer 298.88 (photo credit: Ariel Jerozolimski)
stanley fischer 298.88
(photo credit: Ariel Jerozolimski)
The Governor of the Bank of Israel, Stanley Fischer, is expected on Monday to leave interest rates for September unchanged mainly due to an anticipated slowdown of economic growth in the second half of the year caused by the fighting in the North and the shekel's strength against the dollar. "For now, we expect that the Bank of Israel will leave interest rates unchanged," said Ayelet Nir, chief economist of IBI. "There is no reason why the central bank should raise interest rates when looking at the shekel's strength against the dollar, while inflation also is still at a relatively low level and is not expected to breach the inflation target ceiling of between 1 and 3 percent by year-end." Last month, in the midst of the war, the Bank of Israel raised interest rates by 25 basis points to 5.5% on concerns that increased risk would weaken the currency and push up inflation. "One of the main reasons the Bank of Israel is unlikely to change interest rates this time is the effect of the war on economic activity, which is expected to lead to negative growth in the third quarter of 2006 and reduce economic growth for 2006 from 5% to 4%," said Ilan Arzi, deputy general manager of investments at Direct Investment House. According to a study on the factors influencing Bank of Israel interest rate decisions conducted by Direct Investment, one of the factors that support an interest rate cut or leaving rates unchanged was the decision by the US Federal Reserve earlier this month not to raise its rates. On August 8, the US Fed suspended its two-year campaign of raising interest rates, as the central bank voted to hold its benchmark interest rate steady at 5.25%. But the pause in interest rate increases by the Fed could be short-lived following this week's comments by two Federal Reserve presidents, who said there may be a need for more interest rate hikes to bring US inflation back into a comfort zone. "The Fed's rate decision is the benchmark for the Bank of Israel and the current par enables the central bank to leave interest rates unchanged," said Yoram Gershoni, deputy general manager of investments at Green Bull Asset Management, a division of Israel Discount Bank. "We do think, though, that interest rates will rise moderately over the next few months to 5.75% by the end of this year due to uncertainty over fiscal policy raising questions on how the government will deal with the costs of the war and how this will affect budget discipline." Meanwhile, Uriel Lynn, president of the Federation of Israeli Chambers of Commerce is calling the Bank of Israel to stop following the US central bank's interest rate policy. "While I am convinced that the Bank of Israel will leave interest rates unchanged on Monday, we think the governor should lower interest rates in view of no new inflationary pressures and a strong shekel, which is affecting exports."