Fed 2010 preview? Bank of Israel raises interest rates


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The Bank of Israel today became the first central bank to raise its benchmark short-term interest rate since the global recession began to show signs of reversing in spring.

The bank raised its key rate to 0.75% from 0.50%, citing inflation pressures.


From Bloomberg News:

The decision “strikes a balance between the need to moderate inflation and the need to continue to support the recent recovery in economic activity,” the bank said. “Setting the interest rate at the low level of 0.75% continues to represent an expansionary monetary policy.” “You can read this as the first hike in the recovery cycle,” said Shahin Vallee, an emerging-markets currency strategist at BNP Paribas SA in London.

Still, it’s clear that major central banks, including the U.S. Federal Reserve and the European Central Bank, are in no hurry to begin tightening credit, despite some hopeful comments about the global economy at a gathering of bank policymakers in Wyoming last weekend. Most economists believe the Fed will hold its key rate at the current near-zero level until at least spring 2010.

“With inflation threats distant, there is little doubt that central bankers intend to keep policy interest rates very low for some time to come,” John Lipsky, the International Monetary Fund’s first deputy managing director, said today.

Israel has its own inflation issues, however. “Israel is one of the few countries in the world where inflation is running above target at 3.5%, and [the central bank’s ] mandate is to try and bring it down between 1 and 3%,” Jonathan Katz, an economist at HSBC Securities, told Bloomberg.

In the U.S., inflation as measured by the consumer price index is running negative over the last 12 months mainly because of the plunge in energy prices -- although that deflationary effect on the CPI will end soon.


Unlike the U.S. economy, Israel’s economy began to grow again in the second quarter, expanding at a 1% annualized rate.

-- Tom Petruno