Fischer sets interest rate at 3%
In surprise move, Bank of Israel raises its key rate for month of April by 0.5% due to high consumer price indices in recent months, ongoing rise in housing prices. Decision slammed by industrialists, self-employed as 'outrageous'
The main reason for the surprising and unusual interest rate increase is the ongoing rise in the expected and actual inflation rate. The estimated inflation rate for the next 12 months, calculated by the Bank of Israel according to capital market data, currently totals 3.8%, which is the highest level since the government decided on the current inflation target (1-3%) in early 2003.
The inflation rate predicted by different analysts for the coming year recently exceeded the upper limit of the governmental target, and it now totals 3.1% - its highest level since July 2008, the eve of the global financial crisis.
The actual inflation rate, calculated according to the past 12 months (the February 2011 index compared to the February 2010 index), now totals 4.2% - way beyond the inflation target. The inflation trend in the past four months is even higher, amounting to 6.7%.
Another reason for the interest rate increase is figures published recently, pointing to an acceleration in the economic activity in Israel. According to updated assessments released by the Central Bureau of Statistics two weeks ago, the economic growth totaled 4.6% in 2010 – compared to only 0.8% in 2009. The business sector's product grew by 5.3%, compared to a mere 0.1% rise the previous year.
Apartment prices continued to rise this month, and have gone up by 16.3% in the past 12 months.
'Additional damage to exports'
Avraham Novogrocki, chairman of the Economics Committee of the Manufacturers Association of Israel and CEO of Africa Israel Industries, said in response: "The erosion in the Israeli exports' competition abilities is the most threatening factor on ongoing growth.
"Since the beginning of February the shekel's has appreciated against the US dollar by more than 4%, leading to another erosion in the profitability of exports and causing damage to the economy's growth potential."
"Each interest rate increase strengthens the revaluation trend even more, leading to further damage to Israeli exports' growth potential. The revaluation damages can already be seen in the industrial exports figures for the second half of 2010, which point to a retreat, but we estimate that the fundamental damage is still ahead."
Yehuda Talmon, president of the Lahav organization for the self-employed, said that "raising the interest rate by 0.5% is an outrageous move which points to a failure to understand what is taking place in the economy and in international markets.
"The increase in raw material prices, the steep rise in petrol prices and the crises across the world – all signal that the interest rate should not have been raised at this time."
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