The Bank of Israel said Governor Stanley Fischer's decision to leave its key short-term lending rate unchanged on Monday was part of a "gradual process" of returning the interest rate to a "normal level".
In keeping the key rate at 1.25% after raising it by a quarter-point in each of the past two months and from 0.5% last August, the central bank said inflation in the first quarter is expected to be low while inflation expectations for 2010 look to be within an annual 1-3% target.
"The path of the interest rate will be determined in accordance with the inflation environment, the degree of firmness of growth, both global and in Israel ,and the rate at which the major central banks increase their interest rates," the Bank of Israel said.
Early estimates predicted that the interest would remain unchanged after two consecutive increases, as the fears of inflation have been reduced in the past month.
The Bank of Israel noted that housing prices dropped by 0.8% according to the consumer price index. The inflation rate totaled 3.9% in 2009.
'Exchange rate fundamental threat'
Israeli industrialists expressed their satisfaction with the decision to leave the interest rate unchanged.
Frutarom President Ori Yehudai, chairman of the economics committee at the Manufacturers Association of Israel, welcomed the decision. "There is no justification at this time to continue raising the interest rate, both in light of the low inflation rate expected in the coming months and in light of the fact that the inflation rate this year is expected to be within the target range," Yehudai said.
"The exchange rate is the fundamental threat on the Israeli economy's recovery today, alongside many additional risks for a continued recovery of the Israeli and global economy, and therefore we must beware of additional premature interest rate increases," he added.
The Bank of Israel noted that the interest rate would reach 2.8% in about a year, according to average forecast. According to the capital market, the key rate would stand at 2.5%.