Fischer set to leave rates unchanged

Economic woes make it unlikely Bank of Israel governor will intervene.

Stanley Fischer Good 88 248 (photo credit: Ariel Jerozolimski)
Stanley Fischer Good 88 248
(photo credit: Ariel Jerozolimski)
Bank of Israel Governor Stanley Fischer is expected on Monday to leave interest rates for August unchanged in response to the economy's slowing growth rate and lower inflationary pressures. Fischer warned this week that the slowdown in the rate of manufacturing growth from March to May was the first "serious signal" that economic expansion is beginning to ease. Industrial production rose an annual 6.8 percent in the three-month period, slowing from 11.9% in the December-February period, according to figures released by the Central Bureau of Statistics. "According to our forecast, the central bank will leave interest rates unchanged at 3.75%," said Yaron Sar, head of research at Direct Investment House. "The consumer price index in June fell by a moderate 0.1%, commodity prices have come down significantly this month and oil prices dropped from a record of $145 a barrel to $125 a barrel, dampening inflationary pressures." The Bank of Israel raised the base lending rate by a quarter-point to 3.75% on June 23, the second increase in as many months, as inflation has been exceeding the government's price stability target range of 1%-3% since December. In June, inflation slowed to 4.8% from 5.4% in May, the CBS reported. "The consumer price index for July, though, is expected to rise again to 0.5%," Sar said. The index of leading economic indicators fell 0.3% in June, the first drop in more than three years, the Bank of Israel said Sunday. "The index, which has slowed down in recent months, is an indicator for a slowdown in the economy already from the second quarter," Sar said. Against the negative economic data, figures released by CBS on Wednesday showed that the unemployment rate declined to 6.1% in May from 6.2% in April and 7.4% in May 2007. Commenting on the state of the economy, economists at Bank Leumi cautioned that the positive unemployment figures were a last phenomenon of Israel's economic boom. "Employers are not yet feeling the full impact of the indicators of a slowdown in the economy in the second quarter," Bank Leumi economist Eyal Raz said Thursday. Michael Sarel, head of the economics and research division at Harel Finance, said the depreciation of the shekel, a more moderate rise in the June consumer price index, slightly lowering inflation expectations, were all factors reducing the probability of an interest-rate hike next week. "The likelihood of the central bank raising interest rates is a little above 50%," he said. On July 10, the central bank increased its intervention into the foreign-exchange market from buying $25 million, as announced in March, to $100m. every day, after the shekel strengthened to a 12-year high against the dollar, thereby hurting exporters and slowing industrial production. Since the Bank of Israel quadrupled its daily purchases of dollar, the shekel has fallen as much as 8.8% to NIS 3.48 on Thursday, from a high of NIS 3.20.