The Bank of Israel's raises the interest rate for November 2005 by 25 basis points, to 4 percent

24.10.2005
 
The Bank of Israel’s raises the interest rate for November 2005 by 25 basis points, to 4 percent
 
The Bank of Israel today announced that the interest rate for November 2005 will rise by 25 basis points, to 4 percent. The decision to raise the interest rate was taken to support the government's target of price-stability––defined as an inflation rate of between one percent and three percent a year-long term.
The decision was based on the following considerations:
  There is growing concern worldwide regarding rising inflation due to the rise in energy and goods prices, and tighter monetary policy is expected in the future, which would affect the interest differential between the NIS and other currencies.
  The rate of short-term real interest is lower than that consistent with the rate of economic growth, which has accelerated recently, while there is a gradual contraction of the output gap.
  In the last few months the NIS has depreciated, which under the present circumstances is likely to boost inflation.
  The Bank of Israel's models indicate the need to raise the interest rate to maintain price stability.
  Inflation expectations have risen in the last two months.
The Bank of Israel considers that the current rise in the interest rate is consistent with continued economic growth. The Bank will continue to keep its interest-rate policy under constant review with the intention of maintaining price stability and supporting the attainment of the range of objectives of economic policy.
 
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 Reala Real Nominal Yield gap between US and Israel
January 3.7 2.3 2.25 1.45 4.2 4.0 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 2.0
April 3.5 1.6 2.75 0.75 4.1 3.8 6.6 2.3
May 3.5 2.0 3.0 0.5 4.0 3.6 6.2 2.1
June 3.5 1.8 3.0 0.5 4.0 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 6.1 1.9
September 3.5 1.1 3.75 -0.25 4.3 3.3 6.0 1.8
October 3.75 1.4 3.75 0 4.6 3.3 6.0 1.6
November 4.0   3.75b          
 
a The effective interest rate minus one-year inflation expectations derived from the capital market.
b 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, October 2005, and of Israel–November 2005
(Percent)
Advanced countries
Japan Switzerland US Norway ECB Canada Sweden Denmark UK Australia New Zealand
0 0.75 3.75 2 2 3.0 1.5 2.15 4.5 5.5 6.75
Emerging markets
  Thailand Taiwan Chile Korea Israel Mexico South Africa Brazil Turkey  
  3.75 2.125 4.25 3.5 4.0 9.2 7 19 14.00  
  Czech Republic Poland Hungary  
1.75 4.5 6