Governor of the Bank of Israel Prof. Stanley Fischer has kept the interest rate for August unchanged at 3.25%. The decision was in line with most analysts' forecasts. This is the second consecutive month in which Fischer kept the interest rate unchanged, after raising it by 25 basis points in May. Fischer has raised the interest rate by 125 basis points from 2% in January.

The Bank of Israel said that while the 4.2% inflation rate over the preceding 12 months remain high, seasonally adjusted CPI inflation rates in the last four months are in line with the target inflation range (1-3%), and 12-month inflation expectations indicate that inflation is slowing.

The Bank of Israel added that although most economic indicators published this month indicate robust Israeli economic growth, slower export growth reduced growth in the second quarter. Furthermore, developments in debt crises, the weakness of the US economy, and geopolitical risks increase uncertainty about the pace of economic growth.

The Bank of Israel observed that interest rates in the major advanced economies are expected to stay low for a long time due to concern about a slowdown in US growth and the worsening debt crises in Europe.

The final factor in keeping the interest rate unchanged is the continuing rapid rise in home prices, which rose 13.7% in the 12 months through May. Measures by the Bank of Israel in the mortgage market and real estate tax measures by the Ministry of Finance, combined with the increase in housing starts, are expected to affect homes prices in the coming year, but the effect is not yet noticeable.

Published by Globes [online], Israel business news - www.globes-online.com - on July 25, 2011

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