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The banks announced yesterday that they are raising their prime interest rates by 1.5 percent in the wake of the governor of the Bank of Israel's surprise decision yesterday to hike the central bank short-term interest rate by 1.5 percent to 7.1 percent.

From Thursday, interest charged by banks on overdrawn business accounts will be 13.1 percent, and 15.1 percent for unauthorized overdrafts. Interest on checking account overdrafts will also rise by 1.5 percent. The banks will also increase the rates paid on savings accounts.

The 1.5 percent hike in interest yesterday took the banks by surprise, both in its timing and in its size. The governor traditionally announces monetary policy on the Monday before the month's end, and indeed on May 27 Klein had announced a 1 percent rise in the interest rate for June. However, that decision was not well received by the markets, with many expecting a much sharper increase in order to repress inflation which for the first four months of the year had already exceeded the year's target of 1-3 percent.

Many analysts believe that the shekel's continued appreciation in the past 10 days, despite June's higher interest rate of 3.6 percent - demonstrated by the dollar shooting beyond the NIS 5 level for the first time last Friday - left Klein with little choice but to act, and quickly.

Many traders welcomed the rise, praising the decisiveness of the central bank governor. "Though he could have made a higher interest rate increase two weeks ago," another banker said. One bank economist thought that Klein could have waited for the end of the month before raising interest, which would have demonstrated his reserve in the face of the Forex markets. "The moment the Bank of Israel fails to surprise the markets and runs after them, this is not good for him or for the economy," said the economist. "It is much healthier for the central bank to surprise... At the moment the governor is not leading but is being led."

General opinion among bankers yesterday was that the decision to increase interest rates, effective tomorrow, would stop the shekel's depreciation. "There are no other effective instruments, other than intervening in the Forex market," said one banker, referring to a policy that Klein has repeatedly rejected.