Fischer Leaves Interest Rates Unchanged

Bank of Israel Governor Stanley Fischer is keeping October interest rates unchanged at 0.75%, as most analysts had forecast. The central bank announced the decision yesterday evening. However, economists still expect rates to increase by at least 0.25% by the end of the year.

"The decision to keep the interest rate for October unchanged at 0.75% will help return inflation to within the target range [of 1% to 3%] and underpin the recovery in real activity, while supporting financial stability," wrote the bank in its announcement.

Within minutes of the announcement at 5:30 P.M. yesterday, the dollar jumped 0.5% against the shekel in late trading, to NIS 3.75.

The Bank of Israel was the first central bank in the world to raise rates since the start of the world economic crisis, when Fischer raised rates in August by 0.25% to 0.75%.

Despite the world economic crisis, inflation is climbing in Israel. In 2008 the consumer price index rose 3.8%, and it has gone up another 3.7% so far this year. The CPI is up 3.1% for the past 12 months, which is beyond the government and the Bank of Israel's 1%-3% target range.

Fischer cited three main reasons for his decision. First, "Inflation measured over the previous 12 months is slightly above the target range. Inflation from the beginning of the year, however, excluding the effects of increased tax rates and seasonally adjusted, is at the midpoint of the target range."

In addition, the bank wrote that inflation expectations for the next 12 months are also at around the midpoint of the target range and inflation is "expected to return to within the target range when the short-term effects of the increases in taxation have run their course."

The central bank also explained that the appreciation of the shekel in relation to a weighted basket of currencies in the last few months contributed to the moderation of inflation.

Fischer's second reason for leaving the rate alone was the continued recovery in economic activity and the expectation of faster growth in Israel and around the world. However, the high rate of unemployment also serves to dampen inflationary pressures.

"In addition, there is uncertainty regarding the strength of the recovery in Israel, in part because of the uncertainty about the recovery in the global economy," wrote the central bank, saying it seems that "the current environment is one of recovery from the recession."

The third main reason was that interest rates of the leading central banks around the world are low, and are expected to remain unchanged during the next few months.

Finally, as usual, the Bank of Israel said it will "continue to monitor Israeli and worldwide economic developments, and will use the instruments available to it to achieve its objectives - price stability, the encouragement of employment and growth, and support for the stability of the financial system."