Bank of Israel Governor Prof. Stanley Fischer has kept the interest rate for May remain unchanged at 1.5%. This follows a 0.25% interest rate hike last month.

Despite strong macroeconomic data which has been published recently, the Bank of Israel sees small growth rates worldwide and is concerned that this may adversely affect Israeli growth.

The Bank of Israel said, "The decision to keep the interest rate for May unchanged at 1.5% is part of the gradual process of returning interest to a more 'normal' level, intended to position inflation firmly within the target range, and to contribute to the further recovery of economic activity, while supporting financial stability. The path of the interest rate will be determined in accordance with the inflation environment, the entrenchment of growth in Israel and globally, the rate at which the major central banks increase their interest rates, and in light of developments in the exchange rates of the shekel. At the current level of the interest rate, monetary policy continues to be expansionary."

Commenting on inflation, the Bank of Israel added, "The inflation rate over the past twelve months declined to 3.2%, and since the beginning of 2010 the price level has declined by 0.9%. Seasonally adjusted and excluding the reduction in indirect taxes and the abolition of the water surcharge, inflation since the beginning of the year was 0.6%. It is expected that after the publication of the April CPI, inflation over the previous twelve months will enter the target range and later in the year is even expected to fall below the midpoint of the range. Inflation expectations calculated from the capital market declined to 2.7%, after several months when they rose slowly and were close to the upper limit of the target range. Forecasters' predictions of inflation one year ahead remained stable at an average of 2.7%."

The Bank of Israel continued, "Data that became available this month, in particular the Bank of Israel Companies Survey and foreign trade data, support the assessment that economic growth in Israel is becoming more firmly entrenched. At the same time, according to the updated Bank of Israel forecast, the process of closing the output gap is expected to be a gradual one."

The Bank of Israel also said, "Interest rates of the central banks of the leading advanced economies are very low, and are expected to remain so during the coming months. Nonetheless, some of them are continuing to reduce their use of unconventional instruments of monetary accommodation, and other central banks are starting to increase their interest rates."

The Bank of Israel concluded, "These three factors support a gradual increase in the interest rate, and therefore, following the increase in the rate last month, the Governor decided to leave the interest rate unchanged for May."

Published by Globes [online], Israel business news - www.globes-online.com - on April 26, 2010

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