Despite the expectations of many that the interest rate will might be cut again, the Bank of Israel kept the Israeli basic interest rate at 2.75% for January 2012.
The last time Bank of Israel has reduced its basic interest rate was back in November 2011 when it cut the rate by 0.25 percent points. During 2011, Bank of Israel raised the Israeli interest rate four times mainly during the first months of the year and cut the rate back twice.
This change in direction shows that the Bank of Israel is more concern of the Israeli economy pulling into a recession that reaching the actual inflation target of Bank of Israel (3%).
As of November 2011, during the last 12 months the Israeli inflation inclined by 2.6%, which is well in the Bank’s annual inflation target rate of 3%. There are expectations that the CPI will continue to fall in the next twelve months to 2.53%.
The chart below shows the progress of the Israeli inflation and the Israeli basic interest rate in the past couple of years.
During December the U.S dollar appreciated against the NIS: In December the US dollar slightly inclined by 0.7% against the NIS. On the other hand the NIS has appreciated against the Euro by 2.3% during the last month of 2011. During 2011 the NIS has depreciated against the US dollar by 7.6% and by 4.2% against the Euro. If the Bank of Israel will continue to cut the interest rate in the months to come this may further depreciate the Israeli currency against the leading rates.
Lior Cohen, M.A. economist and blogger at IBR and Trading NRG.
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