On Sunday, Governor of the Bank of Israel Prof. Stanley Fischer will decide the interest rate for April. Capital market analysts are divided about what he will do. Earlier this week, most analysts believed that Fischer would keep the interest rate unchanged. That has now changed, and analysts are equally divided between those who think he will keep it unchanged and those who think that he will raise it.
The increase in assessments that Fischer will raise the interest rate is because inflation expectations are again nearing the ceiling of the 1-3% government inflation target. Market sources also say that cumulative inflation in the next three months will reach 1%, compared with minus 1% in the first quarter of 2010.
The interest rate has been 1.25% for the past three months. The Consumer Price Index (CPI), in a pleasant surprise, fell sharply in January and February, bringing down the 12-month inflation rate. These circumstances were mainly driven by the ongoing drop in the housing item of the CPI, its largest single item. However, this situation has now changed, and the plunge in the CPI has actually strengthened assessments that inflation will pick up in the future.
If Fischer decides to raise the interest rate, it will not be an easy decision, since there are clear signs that the economic crisis is not yet over. The recovery in Israel and other countries is still fragile, and it is necessary to take growth considerations into account when deciding on monetary policy.
Last week, the Central Bureau of Statistics published two negative signals about Israel's recovery. First, the weighted unemployment rate was revised upwards from 7.4% to 7.6%, indicating that the recovery in the labor market has been more modest. Second, exports fell for the third consecutive month, including high-tech exports, Israel's economic growth engine.
Fischer has to take another factor into account when deciding the interest rate: the world's central banks, including the European Central Bank and the US Federal Reserve Bank, have not yet begun raising their interest rates. An interest rate hike in Israel will support an appreciation of the shekel against the euro and dollar, which would force Fischer to again intervene in the foreign currency market.
Published by Globes [online], Israel business news - www.globes-online.com - on March 25, 2010
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