Israeli interest rates - Reverse in the offing?
Bank of Israel became one of the first central banks in the world to start raising interest rates again after knocking them down to rock-bottom, in Israel's case 0.5%.
Bank of Israel interest rates for September are going to stay unchanged at 3.25% - but may not stay there long. The dog didn't bark in the night: the central bank didn't say in its announcement last night, as it has for months, that it aspires to return to "normal" levels of interest. Pundits take that as a hint that the central bank may reverse direction after two years and start lowering interest rates again.
The Bank of Israel became one of the first central banks in the world to start raising interest rates again after knocking them down to rock-bottom, in Israel's case 0.5%. Fischer took the lead and started raising the Israeli interest rate in September 2009. But last night's announcement may hint that Fischer intends to reverse direction.
The Bank of Israel's policy until now had been predicated on the assumption that after the vicious crisis, the world economy was ambling toward what the central bank called a "normal environment." But recent events in the United States and Europe indicate that it may not be, and that recession may return.
It did say last night that its decision to leave the Israeli rate unchanged is consistent with its policy, which aims to bring inflation to within the government-mandated target range of 1% to 3%, to support economic growth and to preserve the stability of the financial system.
The Bank of Israel listed four reasons for its decision, the first being that 12-month inflation expectations receded dramatically, to about 2% in the capital market and 2.5% among forecasters. Not long ago, 12-month inflation expectations had been above 3%, the ceiling of the target range. The research department of the Bank of Israel itself predicts inflation will converge into the target range by year-end; beforehand it hadn't seen that happening before mid-2012.
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