The Bank of Israel, led by Governor of the Bank of Israel Prof. Stanley Fischer, has raised the interest rate by 50 basis points, to 3% from 2.5%.
Many economists had expected a more moderate rise of 0.25%.
The bank said that the reason for the hike was relatively high inflation, housing prices that continue to rise, and the growing sense that eventual interest rate hikes in the US will come a bit sooner than previously thought.
The bank noted that inflation over the previous twelve months is 4.2%, above the 1-3% target range, and inflation forecasts of the Bank of Israel, forecasters, and those derived from the capital market continue to be high. According to those forecasts, inflation over the previous twelve months is expected to remain above the target range throughout 2011 and to return within the target range at the beginning of 2012.
The Bank of Israel also noted that home prices continued to increase this month, and are up 16.3% over the last twelve months. No decline in the volume of new mortgages is evident.
As far as interest rates in other countries, the Bank of Israel said that while they are still relatively low, "the expected timing of an increase in the Fed interest rate has been brought forward, and the European Central Bank is expected to increase its interest rate soon." The Bank of Israel also observed that with a faster pace of inflation in emerging markets, quite a few central banks around the world increased their interest rates this month.
The Bank of Israel said that even after the rise, it considers the interest rate level to be expansionary.
Published by Globes [online], Israel business news - www.globes-online.com - on March 28, 2011
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