Bank of Israel Governor Stanley Fischer raised the benchmark interest rate by the most in more than five years as he focuses on fighting surging inflation amid an expanding economy.
Fischer boosted the rate by a half point to 3 percent, its highest since November 2008, the Jerusalem-based central bank said yesterday. Only one of 21 economists and institutions surveyed by Bloomberg had forecast the decision. Sixteen predicted a quarter-point increase and four said the rate would remain unchanged.
“The Bank of Israel became much more hawkish,” Modi Shafrir, chief economist at Tel Aviv-based I.L.S. Brokers Ltd., said in a telephone interview. “Due to its increasing confidence in the strength of the local and the global economy, it seems like the Bank of Israel intends to focus, in the upcoming months, mainly on the rising inflationary pressures.”
Fischer had until now kept the pace of rate increases gradual, aiming to moderate shekel gains and help exporters compete in world markets. In February, inflation surged to an annual 4.2 percent, the fastest pace in more than two years and outside the target range of 1 percent to 3 percent for the second month. The economy expanded 7.7 percent in the fourth quarter, the most in four years.
The shekel strengthened to the highest level against the dollar this year, gaining as much as 0.2 percent to 3.5163 at 10:15 a.m. The currency climbed 1 percent yesterday, the most in six weeks. The yield on the 5 percent benchmark Mimshal Shiklit government bond due January 2020 was unchanged at 5.35 percent, the highest since it was issued in November 2009.
Fischer “can look to other ways of controlling the currency, the bank has other methods and means, and there comes a point when your monetary policy has to be in line with your economy,” Daniel Hewitt, senior emerging-market economist at Barclays Capital, said in a telephone interview yesterday.
Fischer has lifted the interest rate by 2.5 percentage points since August 2009. He has also purchased foreign currency since March 2008 to moderate shekel gains, more than doubling reserves to a record $73.8 billion at the end of February.
In January, the Bank of Israel announced new reserve rules for foreign-exchange derivative transactions by non-residents as well as new reporting requirements for foreign-exchange swaps and forwards, both aimed at making the shekel a less attractive target for speculators. In addition, Finance Minister Yuval Steinitz said Jan. 27 he would cancel the tax exemption for foreign investors’ profits on short-term government debt.
Even so, the shekel has gained about 4.5 percent since the beginning of February.
“Every increase in the interest rate strengthens the appreciation trend and results in additional damage to the growth potential of Israeli exports,” Avraham Novogrocki, chairman of the economics committee of the Manufacturers Association of Israel and chief executive officer of Africa Israel Industries Ltd., said in an e-mailed statement. “In our estimation, most of the damage is still ahead of us.”
Exports make up almost half of Israel’s gross domestic product. Sales of Israeli goods abroad rose a monthly 4.6 percent to $3.8 billion in February, the fifth month they increased.
Fischer will probably raise the rate to 3.5 percent next month, Hewitt said.
“Inflation expectations for periods longer than a year as calculated from the capital market are still above the upper limit of the inflation target range,” the Bank of Israel said in its statement. “Domestic activity continued to expand, converging toward a situation of full utilization.”
The Bank of Israel staff forecast is that inflation will remain above the target range for the rest of 2011 and that the interest rate will gradually be increased to about 4 percent in a year’s time, the bank said in its statement.
Barclays Capital, the only institution in the Bloomberg survey that predicted the decision, said in its report that the interest rate will probably reach 4.5 percent by the end of this year.
Inflation expectations for the next 12 months were 3.1 percent, according to the central bank’s survey of economists, reported in yesterday’s statement. Inflation expectations derived from the capital market were 3.7 percent.
The TA-25 benchmark index has climbed about 6 percent in the past year, led by Avner Oil Exploration-L.P. and Delek Drilling-L.P., partners in gas fields off the country’s coast.