The main reason for the rate hike to 2.5% in March is mounting inflationary pressure.
The Bank of Israel's primary job is to keep inflation in check, within the boundaries of 1% to 3%. From October 2010 to January 2011, inflation rose to 6.1% in annualized terms, more than double the upper boundary of the target range.
Market players estimate that inflation in a year's time will be running at 3.5%. The Bank of Israel had no choice but to raise interest rates in order to rein in inflation.
It's true that raising interest will boost the shekel, which isn't what the central bank wants. That's the very reason the governor didn't raise the rate by half a percent, as some analysts had thought he might, but only by a quarter. The bankers think though, even hope, that the uproar in the Middle East and administrative steps the central bank has been taking will serve as a counter to the appreciatory pressure and weaken the shekel.
The ones most immediately affected will be homebuyers with mortgages: a quarter of a percent isn't much by itself, but it adds to a quarter-percent a month ago.
And, of course, anybody in overdraft will also feel the pain. As of next week, the cost of debt to the bank will rise by 0.25%.
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