Nov. 23 (Bloomberg) -- The Bank of Israel unexpectedly raised the benchmark interest rate for a second time since the global economy began to recover as growth accelerated and inflation approached the top of the government’s target range.

Governor Stanley Fischer increased the lending rate by a quarter of a percentage point to 1 percent, the Jerusalem-based central bank said today. Twelve of 17 economists surveyed by Bloomberg had forecast no change, while five had predicted the increase.

“The Bank of Israel still has a loose monetary policy, while at the same time signaling that they are serious about fighting inflation,” said Tevfik Aksoy, a London-based economist for Morgan Stanley, who forecast the increase. “The decision won’t hinder growth at all.”

Fischer in August became the first central banker to boost the key rate since the beginning of the global economic recovery, raising it by a quarter point to 0.75 percent from a record low. Inflation accelerated in October to 2.9 percent, compared with 2.8 percent the previous month, the Central Bureau of Statistics said on Nov. 15.

The shekel strengthened to 3.7764 per dollar at 5:57 p.m. in Tel Aviv. The currency traded up as much as 1 percent at 3.7685 per dollar, the biggest increase since Oct. 29. The currency traded at 3.7888 to the dollar before the announcement.

The decision “will help to establish inflation one year ahead firmly within the target range,” the bank said in its statement. “National accounts data for the third quarter indicate recovery in economic activity, reflecting a significant increase in private consumption, exports and investments.”

Inflation Environment

The government’s annual target is for 1 percent to 3 percent inflation.

“Fischer raised the rate because it is not compatible with the inflation environment,” said Arie Tal, chief strategist at Alumot-Sprint Investment House, who forecast the increase. “I expect that he will continue to raise the rate during 2010 to between 1.75 percent to 2 percent by the end of the year.”

Inflation will rise to as high as 3.7 percent two months from now, Tal said before the announcement. The economy grew an annualized 2.2 percent in the third quarter, its fastest pace in more than a year, after expanding 1 percent in the second quarter. The bank expects economic growth to accelerate to 2.5 percent next year from zero expansion in 2009.

“The increase in domestic demand will also bring about inflationary pressures, and that also supports the decision to raise rates,” Tal said.

Index Increases

The TA-25 stock index has increased 65 percent since the start of the year. The index rose the most in two weeks today, adding 10.39, or 1 percent, to 1,077.90 at the close in Tel Aviv.

Mizrahi Tefahot Bank Ltd., Israel’s fourth-largest lender by market value, gained the most in almost three weeks today after third-quarter profit exceeded analyst expectations. Net income increased 11 percent from a year earlier to 156 million shekels ($41.1 million), the bank said.

Lifting the rates while other countries keep their rates unchanged may increase the flow of foreign currency into the country, strengthening the shekel, the central bank said in its Nov. 9 minutes. That would undermine exports, which make up about half of the country’s gross domestic product.

“Interest rates of the leading central banks around the world are low and are expected to remain so during the coming months,” the bank said. “That said, the Fed and the ECB have started implementing steps that point to a gradual exit from the non-conventional aspects of monetary policy.”

To contact the reporter on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net.

Last Updated: November 23, 2009 11:13 EST