The Bank of Israel's raises the interest rate for October 2005 by 25 basis points, to 3.75 percent

26.9.2005
 
The Bank of Israel’s raises the interest rate for October 2005 by 25 basis points, to 3.75 percent
 
The Bank of Israel today announced that the interest rate for October 2005 will rise by 25 basis points, to 3.75 percent. The decision to raise the interest rate was taken to help keep inflation within the limits of the range set by the government, between one percent and three percent a year, a range defined as price stability.
The decision to raise the interest rate was based on the following considerations:
a.    There are increasing signs of upward pressure on prices––inflation expectations for the coming year continue to rise and are currently higher than the midpoint of the target range; the NIS has depreciated somewhat against the dollar, which is likely to provide an impetus to inflation; the Bank of Israel's models also point to the need to increase the rate of interest at this stage to preserve price stability.
b.    The short-term nominal interest rate in the US is higher than that in Israel, and it is assessed that it will continue upwards, and the differential between the long-term dollar and NIS interest rates has contracted.
c.    Global oil prices have risen in the last few months and are exerting upward pressure on prices.
d.    The relatively low level of short-term real interest against the background of relatively rapid economic growth intrinsically exerts certain pressure on prices. The current rise in the interest rate is consistent with continued relatively rapid growth, which is expected to be reflected by further reductions in unemployment.
e.    Persistent political uncertainty is likely to cause economic uncertainty.
The Bank of Israel declares that it will continue to monitor inflationary developments closely, with the aim of achieving the inflation target set by the government and of avoiding deviations from it, both upward and downward, and thereby supporting the attainment of the various macroeconomic objectives, especially those of employment and growth.
 
Table 1: Central Banks' Interest Rates in Israel and the US
(Percent)
2005 Bank of Israel interest rate US Federal Reserve Interest rate Differential between US and Israel central- bank interest rate Yield on one- year Treasury bills Yield on 10-year government bonds
Nominal Real Real Nominal Yield gap between US and Israel
January 3.7 2.3 2.25 1.45 4.2 4 6.9 2.6
February 3.5 1.6 2.25 1.25 4.2 3.8 6.7 2.6
March 3.5 1.5 2.5 1 4.1 3.7 6.6 2
April 3.5 1.6 2.75 0.75 4.1 3.8 6.6 2.3
May 3.5 2 3 0.5 4 3.6 6.2 2.1
June 3.5 1.8 3 0.5 4 3.7 6.2 1.9
July 3.5 1.5 3.25 0.25 4.2 3.6 6.3 1.9
August 3.5 1.5 3.5 0 4.2 3.5 6.2 1.9
September 3.5 1.1 3.75 -0.25 4.2 3.3 6 1.8
October 3.75   a3.75 0        
 
a The US Federal Reserve will announce its next interest-rate decision on 1 November 2005.
 
Table2: Official Interest Rates of Central-Bank in Several Countries, September 2005- and Israel- October 2005
(Percent)
Advanced countries
Japan Switzerland US Norway ECB Canada Sweden Denmark UK Australia New Zealand
0 0.75 3.75 2 2 2.5 1.5 2.15 4.5 5.5 6.75
Emerging markets
  Thailand Taiwan Chile Korea Israel Mexico South Africa Brazil Turkey  
  3.25 2.125 4 3.25 3.75 9.6 7 19.5 14.25  
Other developing countries
  Czech Republic Poland Hungary  
1.75 4.5 6