Governor of the Bank of Israel Prof. Stanley Fischer again cut the interest rate as part of his campaign to prepare the economy for what could be a prolonged economic slump in Europe and a mighty storm in international markets. The campaign may not be the same as the one Fischer waged in the second half of 2008, when he acted quickly to cut the interest rate, but it nonetheless indicates his concern of the repercussions of the global economic crisis on Israel.
Fischer can allow himself to apply an expansionist monetary policy thanks to two other developments. First, inflation is falling, even quite quickly, especially since last summer's social protest. Food prices continue to serve as the best indicator of this trend, falling another 0.4% in December. There is also a feeling that manufacturers and retailers are still deterred against raising prices for a wide range of goods and services. There is also the small drop in housing prices, which also give the Bank of Israel considerable maneuvering room on interest rate decisions.
The second factor that gives Fischer a safety cushion is the budget, whose performance was surprisingly better than expected, even if the 2011 deficit was over 3% of GDP. It is true that Fischer has sufficient reasons to worry about future budget developments, if Israel enters an election year, but as far as the immediate future is concerned, he has enough maneuvering room.
The emerging picture is therefore fairly convenient for Fischer, if that is how his need to act against the rolling crisis in Europe should be described. In fact, his condition would be worse if Israeli manufacturers had raised prices for goods in the second half of 2011, or if the government had capitulated to Minister of Defense Ehud Barak's demands.
As things stand now, Fischer can review the data crossing his desk each month and decided whether there is a need top make another interest rate hike for March. If the answer is yes, no other economic figures will give him cause to hesitate to do so.
Published by Globes [online], Israel business news - www.globes-online.com - on January 24, 2012
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