Israel's Fischer May Raise Interest Rate on Growth, Inflation Forecasts

Bank of Israel Governor Stanley Fischer may increase the benchmark interest rate for the fifth time since August as growth and inflation forecasts climb.

Fischer may boost the rate by a quarter-point again this month to 1.75 percent, according to eight of 15 economists surveyed by Bloomberg. The other seven expected no change. The decision by the Jerusalem-based bank will be announced at 5:30 p.m. local time.

“The Bank of Israel might decide to continue with the tightening in order not to risk causing any over-heating in the economy,” said Tevfik Aksoy, an economist for Morgan Stanley & Co. in London.

Fischer has raised the key rate by a percentage point since August as the Israeli economy recovered from the impact of the worst global recession since the Great Depression. Last week, the Bank of Israel boosted its economic growth forecast for a second time this year, increasing it to 3.7 percent from 3.5 percent.

The economy emerged from recession in the second quarter of 2009 as exports surged, helping growth accelerate to 4.8 percent in the fourth quarter, the fastest pace in almost two years. Exports, which account for almost half of gross domestic product, rose by almost 50 percent annually in the fourth quarter. Exports will increase 9.2 percent in 2010 instead of an earlier forecast of 8.6 percent, according to a Bank of Israel forecast on April 21.

Exports at Intel Corp.’s Israel unit more than doubled in 2009 to a record $3.4 billion as it increased production at the new Fab 28 plant in Kiryat Gat, south of Tel Aviv. The company accounted for 10 percent of the country’s industrial exports, Intel Israel’s General Manager Maxine Fassberg said on Feb. 8.

Unemployment Steady

As the economy expands, labor market conditions have improved, with the jobless rate holding at a 13-month low of 7.3 percent in February, the Central Bureau of Statistics said April 22. Unemployment is expected to drop to an average of 7 percent in 2010, from 7.7 percent last year, according to the central bank’s forecast.

Israel’s benchmark TA-25 stock index surged by more than 50 percent in the past 12 months, led by Delek Group Ltd., a partner in a gas find at the Tamar field off Haifa’s coast last year. The index has gained about 6 percent since the beginning of the year.

While the Bank of Israel’s growth forecast has risen, inflation expectations have also increased. Consumer prices are expected to rise by 2.6 percent in the next 12 months, according to a Bank of Israel survey of economists released April 18, up from 2.4 percent in March.

Hurting Exports

“Inflation forecasts for the 12-months forward started to rise again, and in our view this needs to be addressed by a decisive policy stance,” Aksoy said.

Inflation in March dropped to an annual 3.2 percent, from 3.6 percent the previous month, while remaining above the government’s target range of 1 percent to 3 percent for a fifth month.

The Bank of Israel is in the process of gradually bringing the rate back to a more “normal” level, intended to bring inflation into the target range and to maintain it there, the central bank said in the minutes of its last rate-setting meeting, released on April 12.

Concern that raising the base rate may strengthen the shekel and hurt exporters is one reason Fischer may opt to leave the benchmark unchanged this month, said Arie Tal, chief strategist at Alumot-Sprint Investment House Ltd. in Herzliya, near Tel Aviv. Expectations that expansionary monetary policy in the major developed countries will continue is another reason, he said.

The shekel has strengthened about 2 percent against the dollar this year, and was trading at 3.7150 at 9:52 a.m. in Tel Aviv, even as the central bank continues to buy foreign currency in an effort to weaken the currency.

“A pause would not surprise, but might raise the risk of tightening more aggressively in the future,” Aksoy said.

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

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