Citi proved to be one few prescient banks when it correctly predicted yesterday that Governor of the Bank of Israel Prof. Stanley Fischer would raise the interest rate. Today, Citi analyst David Lubin said, "We think the Bank of Israel has emerged from the crisis as one of the most credible central banks Central and Eastern Europe, the Middle East, and Africa."
Lubin explained that the Bank of Israel supported Israel's recovery last year with aggressive measures to loosen monetary conditions, and it is now withdrawing that stimulus in a way that does not threaten the economy.
Lubin predicts that Israel's interest rate will reach 2.25% by the end of 2010, after two more rate hikes. "These rate hikes will be needed to maintain the Bank of Israel's commitment to its 'gradual process'," he said.
Lubin cited four key factors in the Bank of Israel's analysis to raise the interest rate. The first factor was a commitment to a consistent and smooth stimulus-withdrawal. The second factor was the feeling of need to do something to contain inflation expectations, which have risen in recent months due to the shekel's weakness. The third factor was the Bank of Israel's concerns about house prices and housing credit. The fourth factor was that, despite the rate hike, the real interest rate is still negative and, as the Bank of Israel put it, "monetary policy continues to be expansionary".
Published by Globes [online], Israel business news - www.globes-online.com - on July 27, 2010
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