The Bank of Israel reported yesterday that it will leave the Israel’s basic interest rate unchanged at 3%. The main reason Bank of Israel didn’t raise its interest rate is due to the appreciation of the Shekel compared to major currencies including the US dollar. The US dollar is deprecating against major currencies due to the slow recovery of the US economy; therefore increasing the interest rate will only further strengthen the Shekel compared to the US dollar. The Bank has already been trying to fight off the appreciation of the Shekel by purchasing US dollar with little effect on the Shekel’s strength.
The current interest rate at the same level it was back in December 2008 as seen in the chart below:
The average market expectations of the annual Israeli inflation are still at 3.1%, which is higher than the upper inflation target of the Bank. Since, however the expectations didn’t rise compared to last month, probably due to the April interest rate inclination, the Bank of Israel decided to slow play its hand and not to further increase its rate for now.
The interest rates in major economies are still low (European Union, US) and on the other hand the expectations of Israel’s GDP growth rate in 2011 has been updated by the Bank of Israel from 3.8% (annual growth rate) to 4.5%, these factors also contributed to the Bank’s decision to leave the basic interest rate at 3%.
I also think that the Bank’s progress in curbing the Israeli inflation growth isn’t working as the Bank expected since the CPI is still growing all through 2010 and up to March 2011 as seen in the chart below due to the hike in real estate prices and the rise in major commodities such as crude oil. Perhaps had the Bank not raised the basic rate, the inflation might have been even higher than its current level.
Nonetheless, I think that Bank of Israel will resume its interest rate increase in the months to come as it will keep close tabs at the rise in Israeli inflation.
Want a more detailed analysis on Inflation in Israel? IBR can do it for you…read here for more
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