The Bank of Israel's raises the interest rate for December 2005 by 50 basis points, to 4.5 percent

28.11.2005
 
The Bank of Israel’s raises the interest rate for December 2005 by 50 basis points, to 4.5 percent
 
The Bank of Israel today announced that the interest rate for December 2005 will rise by 50 basis points, to 4.5 percent. The rise is necessary to help keep inflation within the government's target of price-stability––defined as an inflation rate of between one percent and three percent a year.
The decision was essentially based on the increasing number of indications of continued upward pressure on prices. Thus the rate of inflation, which has risen in the last few months, is expected to reach close to the upper limit of the inflation target range in 2005, and may even exceed it in the first months of 2006. The Bank of Israel's interest policy, including the current decision, is aimed at bringing inflation back to the midpoint of the target range, but this process is expected to take several months.
The following are the main reasons for the current pressures on prices:
    The anticipated effects of the cumulative rate of depreciation of the NIS against the dollar.
  Continued rapid economic growth.
  The persistent upward trend in inflation rates world wide, which leads to higher central banks' interest rates, including the dollar interest rate.
  Political uncertainty affects the markets and will probably continue to do so, despite the fact that fiscal discipline is likely to be maintained.
The Bank will continue to keep inflation under close and constant review, with the intention of reaching the government's target without deviating from it either upwards or downwards. The Bank supports the attainment of the range of objectives of macroeconomic policy, and in particular, the encouragement 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 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 1.5 3.75 0 4.6 3.3 6.1 1.6
November 4.0 1.9 4.0 0 4.9 3.6 6.3 1.8
December 4.5   4.0b 0.5        
 
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 13 December 2005.
 
Table2:Official Interest Rates of Central Banks in Several Countries, November 2005, and of Israel, December 2005
(Percent)
Advanced countries
Japan Switzerland US Norway ECB Canada Sweden Denmark UK Australia New Zealand
0 0.75 4 2.25 2 3.0 1.5 2.15 4.5 5.5 7
Emerging markets
  Thailand Taiwan Chile Korea Israel Mexico South Africa Brazil Turkey  
  3.75 2.125 4.5 3.5 4.5 8.9 7 18.5 13.75  
  Czech Republic Poland Hungary  
2 4.5 6