The central bank governor raised interest rates yesterday for two reasons: political and economic.
Israel currently has a lame duck prime minister and a limping government. The treasury is on hiatus. For the first time in many years, the government is not busy debating next year's budget this month, July, and no one knows whether it will get around to doing so in August, either. The governor, currently the most powerful person in the Israeli economy, feels obliged to maintain a particularly careful monetary policy.
On the economic front, the central bank governor decided to take no chances, as he did in March and April (cutting interest rates twice by 0.5%), and has returned to the traditional policy of Israeli central bank governors and European state banks, which give inflationary considerations clear priority over growth, even though this could jeopardize the central bank's efforts to devaluate the shekel by intervening in the foreign currency market.
The governor is worried about losing control over prices of both imports and Israeli-made goods. Fischer also believes that current economic growth rates are satisfactory, in spite of the concerns, and that raising interest rates will have no adverse effect on this or the high employment rate. In fact, the governor thinks that 4.0% is not that high an interest rate.
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