Bank of Israel Leaves Interest Rates Unchanged

Central bank Governor Stanley Fischer has left May interest rates unchanged at 3.25%. The decision follows two consecutive months of interest rates cuts of 0.5% each, and maintains a 1.0% gap between Bank of Israel and U.S. Federal Reserve Board interest rates. However, the Federal Reserve is slated to announce May interest rates tomorrow, which may well involve a 0.25% cut. The Bank of England is also expected to continue trimming interest rates in coming months.

In a Bank of Israel announcement issued yesterday, the central bank did not rule out the possibility of raising interest rates in coming months, in light of rising inflation in recent months: "The Bank of Israel will continue to monitor economic developments and their effect on inflation in Israel closely, and will stand ready to raise the interest rate as necessary to preserve price stability."

The central bank says that the decision to leave May interest rates unchanged is consistent with a return of inflation to within the target range of 1-3 percent in the next 12 months (until recently the central bank had expected inflation rates to return to target levels by the end of 2008). The Bank of Israel adds that inflation in the past 12 months is currently higher than the target level of 3.7% and similar to that prevailing in the United States and Europe, due to the continued rises in energy and food prices. Global economic slowdown, the bank says, is expected to both check food and energy prices and slow economic expansion and inflation in Israel.

"In light of the slower growth in the advanced economies, interest rates abroad are expected to continue falling, albeit more slowly than previous assessments" the bank forecasts, adding that the decision to keep May interest rates unchanged is consistent with support for growth and employment.

The Manufacturers' Association responded to the announcement with satisfaction, calling that the governor's decision "responsible," especially in light of the global economic crisis and concerns about the force of its effect on the Israeli economy."

The president of the Federation of Israeli Chambers of Commerce, Uriel Lynn, agrees. "The decision is the correct one. It is a the result of inflationary pressures, the global business environment and the conditions that are now influencing foreign exchange rates and the values of leading currencies of the world."

Yaron Zer, director of the research department at Yashir Investment House, said that concerns over inflation, which is expected to reach an annual rate of 4.4% in a few months, has forced the governor to maintain current interest rates - even though he would have far preferred to lower them on the backdrop of the weak dollar and expectations for a substantial economic slowdown, which is expected to become more severe later this year. Zer says that between these two opposing trends, the governor has, for the meanwhile, chosen the middle road.