The Bank of Israel yesterday raised its overnight lending rate by a quarter percent, to the surprise of market circles.
There had been no consensus, but most analysts thought Governor Stanley Fischer would elect to leave Israeli lending rates for December 2009 unchanged.
In August, Israel became the first of the developed nations to start raising interest rates since the global economic crisis began in 2008. Even then, Fischer elected for caution, raising the Israeli rate from its historically low point of 0.5% to 0.75%. Yesterday he tweaked the rate again, raising it by a quarter-percent to 1%, no more.
Israel's retail banks will be raising their rates on overdrafts this Friday, also by a quarter percent.
In its announcement, the central bank listed three main reasons behind its rate hike. The first was that inflation has been raising its head. Over the last 12 months, it rose to 2.9%, near the ceiling of the Bank of Israel's target range for inflation, which is 1% to 3%. Worse, in the months to come, inflation is expected to pass that ceiling of 3% as consumer spending picks up with other economic indicators.
The 0.25%-rate hike is expected to keep inflation within the target range, looking ahead 12 months.
The second reason the central bank listed was precisely that element of consumer spending, which rebounded strongly in the last few months, as confidence began rebuilding.
The third reason was that even though other central banks are keeping their interest rates low, the central bank is predicting they, too, will start jacking up their rates during the first half of 2010 as the Western economies recover. Central banks in Europe and the U.S. Federal Reserve have begun taking steps that indicate they plan shortly to exit their strategies of monetary expansion - cheap money that stimulated the economies, but could lead to inflation down the line.
Reactions to Fischer's move were mixed. Michael Sarel, head of the economics and equity research department at Harel, supported the increase and called for more. Sarel, for one, is concerned about an inflationary outbreak in the years to come.
He had been one of the few to predict the increase: A Bloomberg survey had found that among 16 analysts, 11 predicted the Israeli rate would remain unchanged at 0.75% in November.
Sarel also noted that one of the reasons the Bank of Israel hadn't been raising interest rates is concern for exporters - the higher interest rates are, the more the shekel is likely to climb against other currencies, which is bad for exporters. But the export figures for the last few months have been terrific, Sarel pointed out. That made it easier for the central bank to take the risk and raise the rate.
Uriel Lynn of the Manufacturers Association also applauded the increase, but Yehuda Talmon, president of the Lahav umbrella organization of the self-employed, did not. "The [rate hike] frustrates the business sector's attempt to recover," he stated.
Rafi Gozlan, macro strategist at Leader Capital Markets, admits to having been surprised: The central bank wanted an ounce of prevention, he says. It was clear that interest was trending upward. But Gozlan said the surprise lay in the timing.
Gozlan's counterpart over at Clal Finance, Amir Kahanovich, was firmest in his praise. "It was the right thing. The governor did well by ending inflationary pressures. Inflation expectations had risen beyond 3%, and when inflation breaks out, [vanquishing it] isn't simple."
In its own announcement, the Bank of Israel pointed out that the consumer price index had risen by 2.9% in the last 12 months, but seen from January 1, the CPI had risen by 3.6%. It is true, continued the central bank, that after one adjusts the figures for seasonality (think end-of-season shoe sales, start-of-season strawberries) and for the price increases following tax policy changes (think drought tax, VAT), "the annual rate of inflation from the beginning of the year to October was close to the midpoint of the inflation target range."
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