Israel has raised its key interest rate for April by half of one per cent – the largest rate rise since before the financial crisis. Bank of Israel was one of the first central banks to begin raising rates, starting in September 2009 with a quarter point rise from a record low of 0.5 per cent. Since then, there have been eight quarter-point rises, but this is the first half-point rise. In April, the Bank’s rate will be 3 per cent.
The move is an attempt to slow the economy and housing market, and rein in inflation. Israel’s economy is expanding, “converging towards a situation of full utilization of the factors of production”. The stats would send most Western central bankers green with envy. Last year, the economy grew by 4.6 per cent, rising to an annualised rate of 7.7 per cent in the last quarter. Unemployment is about 6.6 per cent and improving. But there is concern over inflation and housing. Consumer prices are rising 4.2 per cent annually, against a target of 1-3 per cent. Even stripping out house prices, inflation is 3.5 per cent annually. And there is evidence that inflation expectations and real wages are beginning to rise, too. Meanwhile the housing market continues to boom, with prices rising 16.3 per cent in the year to February and no decline evident in the appetite for new mortgages. Read more
Fighting currency appreciation is an expensive business. It cost the Swiss SFr 21bn ($23bn) before they gave up and let the franc rise. New figures out from the Bank of Israel show it cost them NIS 17.6bn ($4.8bn). The Bank’s overall loss was NIS 17.9, of which 98 per cent can be attributed to exchange rate moves.
Israel’s foreign exchange stockpile has been growing – but the governor says these reserves might prove useful if there is a reversal of capital flows. Israel has been raising rates to contain inflation and dampen the too-buoyant housing market. The governor has called for international rules on foreign exchange markets and capital flows, just as exist currently for trade.
The Bank of Israel has raised its March interest rate by a quarter of one per cent, prompted by higher than expected inflation, strong economic activity and continued fears about an overheating housing market.
Israel’s central bank also said “the expected timing of an increase in the Fed interest rate has been brought forward”. Read more
There are international rules to govern global trade, but none to oversee foreign exchange markets or capital movements, Israel’s central bank governor has observed.
Stanley Fischer said standards for capital movements were needed, even though it was not possible to govern how much central banks could intervene in markets. Reuters news wire reports: “It is important that the IMF is now trying to develop such rules, to figure out what works and what doesn’t work when the exchange rate starts to appreciate and … what measures they can take that are acceptable from the viewpoint of managing the international economy,” he told a conference. “Those are rules we have to develop just as we developed rules gradually in the years since the 1950s that produced a global trading system,” he added.
Many countries grappling with “hot money” blame the US openly and directly, but Professor Fischer did not join them. “I believe the US is doing what needs to be done for growth. Read more
Israeli foreign currency reserves rose to $73.4bn by the end of January as the country’s central bank bought foreign currency to dampen the shekel. The Bank bought $2.09bn and benefitted from an upward revaluation of its reserves by $628m, reports Bloomberg news wire.
Since the start of the year, the shekel weakened against the dollar, from 3.51421 to 3.712 per dollar, which explains the upward revision. Last time there was a net weakening in the currency over the month, it was followed by a net reserve reduction the month after (October-November last year). By that logic we could expect Israel’s foreign exchange purchases to fall during February. Read more
Israel’s foreign currency reserves stood at $70.9bn at the end of December, according to Bloomberg – but they may well be needed.
Central bank governor Stanley Fischer has warned that capital inflows could reverse sharply, leading the Bank to sell its reserves to try to slow any sudden weakening of the shekel. “One of the things that does concern us is that we have a lot of money coming in,” Mr Fischer told Bloomberg Radio in Davos. “If opinions change quickly money goes right back out and it could go out very fast.” Read more
Stanley Fischer’s mantelpiece must be full. He’s just won another central banker award, this time Central Bank Governor of the Year from euromoney magazine, which has been running the award for 30 years.
Just yesterday, Sunday, he was awarded best Middle East central bank governor from magazine Emerging Markets. Last month, he was one of only seven central bankers to be awarded an ‘A’ grade by Global Finance magazine. Read more
Rising inflation expectations, and ‘steeply’ increasing house prices have encouraged the Bank of Israel to raise its policy rate, continuing a programme of rate normalisation. October’s interest rate – not shown on the chart as we are still in September – will be 2 per cent.
Inflation expectations calculated from the capital market for one year ahead and those of the private forecasters remain in the area of the upper limit of the target inflation range, with the interest rate expected to rise to about 2.7 percent in a year’s time.
Low interest rates are also encouraging housing loans: Read more
Israel’s central bank will raise August’s key interest rate 25bp to 1.75 per cent. The raise, not yet shown on the chart which is accurate to today, will be the fifth 25bp increase since the bank started raising in 2009.
Rising inflation expectations are motivating the move: Read more
As part of normalisation of interest rates, the central bank of Israel has raised the benchmark interest rate to 1.5 per cent. The Bank stressed that even with the rise, monetary policy remains expansionary. Annual inflation, at 3.6 per cent, is currently above the target range of 1 – 3 per cent. The rise was:
Intended to return inflation to within the target range and to keep it there, 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. Read more
Stanley Fischer is to serve a second term as central bank governor of Israel, following the passage of a reform bill that he had declared a pre-requisite.
Zambian-born Professor Fischer was educated at the London School of Economics and MIT, among others. He was Ben Bernanke’s thesis advisor. Read more
Israel’s third-largest bank will stop taking shekel deposits from Palestine Islamic Bank and will reconsider relations with other Palestinian banks, for as yet unidentified reasons.
From Reuters: Read more
Perhaps Japan will take a note out of Israel’s book. There is an ongoing war of words between Japan’s finance ministry and its central bank, in which the government asks the bank to tackle deflation, and the bank asks the government to fix the fiscal deficit. As Robin has pointed out, the ‘pressure’ being applied to the bank is more of a nudge than an ultimatum. But if the government wanted to step up the pressure, it could use the minimum wage to affect monetary dynamics. This is a charge levelled today by Bank of Israel governor Stanley Fischer against the Israeli finance ministry, who told parliament the tactic has been used at least once (Israeli speech from Bloomberg).
The Israeli central bank has chosen to keep its benchmark interest rate on hold at 1.25 per cent. The decision was widely expected, though some predicted a small cut in rates. Inflation in the country is falling faster than expected, with CPI down 0.7 per cent in January, versus expectations of 0.3 – 0.5 per cent. Israeli economic activity has risen, although fixed investment has dropped significantly. Internationally, “there remains the risk of another recession, whose probability may even have increased.”
Israeli interest rates are likely to remain on hold for longer, after data showed an unexpected drop in the inflation rate from 3.9 to 3.8 per cent. In a Bloomberg survey, none of 11 economists predicted a fall. Consumer prices dropped 0.7 per cent in the month.
The Israeli central bank was one of the first to raise rates following the financial crisis. Since August of last year rates have risen three times from a record low of 0.5 per cent to 1.25 per cent. Read more
With very little enthusiasm, Israeli politicians have given preliminary approval to a bill that would completely change the policymaking framework of the central bank. The first reading was passed 22-2 (that’s 24 people voting out of a possible 120). Two further approvals are required before the bill can become law.
Currently, the central bank governor has sole responsibility for making interest rate decisions, after discussions and a non-binding vote by central bank department heads. The bank has worked this way since 1954.
Discussions have been underway for 12 years to move toward the European/American model, in which a committee or board cast binding votes on the interest rate decision. The current proposal is to create a six-member board headed by the governor. Read more
The governor of Israel’s central bank has denied the country is experiencing a property bubble. “We have a problem of real estate market and people call it a bubble. But this is not a bubble,” Professor Stanley Fischer said at the tenth annual Herziliya conference.
Bubble denials are always tantalising, as only time can confirm or deny them, with ample room for speculation in between. House prices rose 5.6 per cent in 2009, contributing to an inflation rate of 3.9 per cent last year. This does not settle the bubble question, of course. We need to know about supply and demand. Read more
The Bank of Israel is rumoured to have bought about $100m of foreign currency today. Traders have told Reuters that this is the fifth forex intervention in 2010, as the bank tries to slow the rapid appreciation of the shekel. The currency has gained about 3 per cent against the US dollar since the start of the year as foreign banks have sold dollars. Israeli inflation during December has just been released: it was 3.9 per cent, up from 3.8 per cent in November.
The Bank of Israel yesterday raised its 2010 growth forecast from 2.5 per cent to 3.5 per cent. Bank forecasts are now more in line with analyst expectations: last week, Bank Leumi raised its forecast to 3.5 per cent and on Sunday, Bank of America Merrill Lynch did the same. An increase in demand for exports is driving the recovery, and the optimism.
The main assumptions underlying the 2010 forecast are that global trade will increase 7 per cent, terms of trade will deteriorate by 2.1 per cent. Unemployment is expected to fall below 7 per cent by the end of 2010. Details of the forecast and assumptions are below: Read more
Traders re-establishing short positions in the dollar may be causing the appreciation of the shekel, which officially closed at 3.736 yesterday. The Bank of Israel – which now only intervenes in unusual circumstances – bought between $200m and $300m at around 1200 GMT Tuesday, said dealers.
The currency closed 2009 at 3.775 to the dollar, with hardly any movement during December, a traditionally quiet trading month as traders seek to hold their positions. But the shekel has appreciated 1 per cent against the dollar over the first two sessions of 2010 and has now advanced for seven straight sessions. “Overseas banks have opened new positions and those positions are short dollar-shekel,” said a dealer at Bank Leumi. Read more