Fischer Holds Israel's Benchmark Rate at 1.75 Percent as Inflation Slows

The Bank of Israel left its benchmark interest rate unchanged after inflation dropped below the midpoint of the target rate, even as the economy continued to strengthen.

Governor Stanley Fischer left the rate at 1.75 percent, the Jerusalem-based central bank said today. Fifteen of the 16 economists surveyed by Bloomberg forecast the decision, while one expected a quarter-point increase.

“The decision was mainly due to the decline in expected inflation following the July consumer price index, which was lower than expected, and the strengthening of negative sentiment regarding global growth, especially in the U.S.,” Yaniv Hevron, head of macro-strategy at Ramat Gan, Israel-based Excellence Nessuah Investment House Ltd., said by e-mail.

Fischer has raised the key interest rate by 1.25 percentage points in the past 12 months as the economy recovers from the impact of the worst global recession since the Great Depression. At the same time, inflation has eased from 3.5 percent a year ago to 1.8 percent last month, within the government’s 1 percent to 3 percent target.

While most indicators of economic activity published this month point to continued expansion, concern over the sustainability of that growth remains, the bank said. This is due mainly to the “high degree of uncertainty” prevailing in the global economy, it said.

Economy Rebounds

Israel began to recover from the global crisis ahead of many developed countries, prompting Fischer to become the first central bank governor to raise rates in response to signs of growth a year ago. Countries that have followed suit include Australia, India and Norway.

Economic growth unexpectedly accelerated to an annualized 4.7 percent in the second quarter, the Central Bureau of Statistics said on Aug. 16.

The rebound in the economy has prompted Israel’s benchmark TA-25 stock index to gain 18 percent in the past year, led by Avner Oil & Gas Ltd., a partner in the Tamar gas field off Israel’s coast.

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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