Governor Stanley Fischer raised the rate by a quarter point to 1.50 percent, the Jerusalem-based central bank said today. Economists were split on whether the bank would tighten credit today with six surveyed by Bloomberg predicting the decision and eight expecting no change.
“Raising the rate now broadcasts a determined message in the face of the recent increase in inflation expectations and will prevent unnecessary increases in the future,” said Rafael Gozlan, chief economist at Tel Aviv-based Leader Capital Markets Ltd., who predicted the rise.
Economic growth accelerated to an annualized 4.9 percent in the fourth quarter from 3.6 percent in the previous three months. The spread between 2013 fixed-rate bonds and inflation- linked bonds with a similar maturity has widened by about 30 basis points this month, indicating that investors are expecting inflation to accelerate.
“The current increase is made against the background of growth that continues to become more firmly based, inflation expectations that are close to the upper limit of the target inflation range, and the rise in asset prices,” the Bank of Israel said in an e-mailed statement today.
The benchmark Mimshal Shiklit note due February 2019 fell 0.02 shekel to 108.95 at the close in Tel Aviv and prior to the release of the decision. The yield on the 6 percent security rose one basis point to 4.81 percent, the highest since Feb. 24. The Tel Aviv Stock Exchange is closed Monday and Tuesday for the Passover holiday. The shekel last traded at 3.7365 to the dollar on March 26.
Economic Recovery
Fischer had held the rate since the end of December after increasing it by a quarter-point three times as the economy recovered from the global crisis.
“Most indicators suggest that economic activity continued to expand in the first quarter of 2010, but it seems likely that the rate of increase will be lower than that in the previous quarter,” the bank’s statement said.
The interest rate increase isn’t likely to trigger a significant reaction in the currency or bond market, said Inon Dafni, an economist at Israel Discount Bank Ltd., the country’s third largest lender.
“I don’t expect any real surprise for the bond market as yields were pricing in an interest rate hike,” he said. “The shekel may strengthen, but still there is no major shock here.”
Forecasters on average are expecting the benchmark interest rate to increase to 2.9 percent 12 months from now, the central bank statement said.
Target Range
Inflation expectations for the coming year have risen to 2.9 percent, close to the ceiling of the government’s target range, Alon Katz, head of research at Maor-Luski Investment House in Tel Aviv, said. For the following year, expected inflation is 3.2 percent, he said. The government target for annual inflation is 1 percent to 3 percent.
Bank Leumi Le-Israel Ltd., the country’s largest lender, raised its growth forecast for the year to 3.8 percent from a previous 3.5 percent on March 25.
“The market is signaling to Fischer: Hey, we are concerned about inflation,” Katz said prior to the announcement. “The market had anticipated that he would raise in May or in June. Raising it a month earlier is an important signal. He is saying: ‘I can see what you are afraid of and I’m not going to let it happen.’”
Israel’s benchmark TA-25 stock index surged 75 percent last year, 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 7.5 percent since the beginning of the year.
Fischer was appointed to a second term on March 17. One of his tasks in the new term will be to implement a new law governing the central bank that calls for the creation of a six- member Monetary Policy Committee. Currently, Fischer has sole responsibility for setting rates.
