Israel Unexpectedly Boosts Benchmark Rate to 1.75% as Housing Prices Rise
Stanley Fischer, governor of the Bank of Israel
Kerem Uzel/Bloomberg
Stanley Fischer, governor of the Bank of Israel, a seminar in Istanbul, on Oct. 3, 2009.
Stanley Fischer, governor of the Bank of Israel, a seminar in Istanbul, on Oct. 3, 2009. Photographer: Kerem Uzel/Bloomberg
The Bank of Israel unexpectedly raised its benchmark interest rate for the first time in four months as housing prices climbed and inflation expectations remained high.
Governor Stanley Fischer increased the rate by a quarter percentage point to 1.75 percent, the Jerusalem-based central bank said today. Five of 16 economists surveyed by Bloomberg had predicted the decision, while eleven expected no change.
“It seems that the governor has changed his position and he is giving greater importance to inflation expectations than to continued support of growth in the economy,” said Dan Ron, chief investment officer of Tel Aviv-based Tachlit Investment House.
Fischer raised the key interest rate by a percentage point between August and March as the economy recovered from the impact of the worst global recession since the Great Depression. During the past year, housing prices have risen 20 percent, and if they continue to increase at this pace, a bubble may develop, Fischer said July 19.
The shekel strengthened to 3.8280 against the dollar at 6:42 p.m. in Tel Aviv from 3.8480 just before the decision was announced.
The benchmark Mimshal Shiklit note due January 2020 rose 0.04 shekel to 106.12 at the close in Tel Aviv. The yield on the 5 percent security was 4.51 percent. It reached a low of 4.49 percent on July 22.
Bond Impact
Most bonds are likely to be hurt, Amir Kahanovich, an economist at Clal Finance Investment Management Ltd. in Tel Aviv, said in a telephone interview. “Bonds in general hate a surprise increase in interest rates, especially CPI-linked bonds with longer maturities.”
While inflation slowed to 2.4 percent in June, falling within the government’s 1 percent to 3 percent target for the first time since October, inflation expectations for the next 12 months, as derived from the bond market, are at 3.3 percent, said Arie Tal, chief strategist at Alumot-Sprint Investment House Ltd. in Herzliya, Israel.
The rate of increase in housing prices “continues to be very rapid, and if prices continue to rise at the current pace they are likely to deviate from the level consistent with the basic economic conditions,” the bank said in its statement today.
Israel began to recover from the global crisis ahead of many developed countries. The economy is expected to grow by 3.6 percent this year, according to a June 6 Finance Ministry forecast, and by 3.8 percent next year.
Jobless Low
Unemployment fell to a 1 1/2-year low in May, declining to 6.5 percent from 6.6 percent the previous month. Unemployment is likely to drop to 7.3 percent this year, from 7.6 percent in 2009, the Finance Ministry said in the June 6 forecast.
Israel’s benchmark TA-25 stock index has gained by about 18 percent in the past year, led by Perrigo Co., the world’s largest maker of non-prescription, store-branded drugs, which nearly doubled.
In August, Fischer became the first central bank governor to raise rates in response to signs of a recovery. Other countries to follow suit include Australia, India and Norway.
Fischer, who currently has sole responsibility for setting rates, was appointed for a second term as governor on March 17. He is in the process of implementing a new law that calls for the creation of a six-member Monetary Policy Committee to make rate decisions.
To contact the reporter on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net.
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