Governor Israeli central bank increases rates

08-25-2009 14:59

Stanley Fischer is the first governor of the Israeli central bank to increase the lending rates that could result in an appreciation of the national currency, which could hamper a revival of Israel’s economy. Surprisingly, the central bank’s governor raised the interest rates by 0.25% to 0.75%. The Israeli New Shekel posted a third day of gaining, reaching 3.7917 at 10:06 a.m. in Tel Aviv-Yafo.

Extreme appreciation

Win Thin, a currency strategist at Brown Brothers Harriman & Co. (BBH) in New York, stated: “Only several weeks ago the central bank was intervening strongly in order to avoid an extreme appreciation of the Shekel. The two targets of a lower Shekel rate and stronger interest levels are adversary.”

Governor Israeli central bank

The current governor of the Bank of Israel strives to expound a monetary policy that aims on expansion, while the national currency continues to rise. Only two weeks ago, Fischer ended the daily acquisition that has resulted in approximately $52 billion in reserves after the beginning of his purchasing in March 2008, while yesterday he obtained Dollars.

Increase rates

Arie Tal, chief analyst and strategist at Alumot-Sprint Investment House, commented: “Yesterday, the Bank of Israel obtained “at least tens of millions of Dollars. Fischer understands his two targets: Purchasing Dollars to shore exporters and increase rates to restrain inflation.” The governor of Israel’s central bank stated on August 10 that he would terminate the day-to-day acquisition of $100 million in overseas currencies. He also announced that he would only purchase if the Israeli New Shekel faces “uncommon developments” and he would end the acquisition of bonds.

Unfavorable development

The economies in Israel, Japan, Germany and France all restored economic growth in the second quarter, on which Fischer said that “we have witnessed the initial indications that the worldwide economy recovers.” Koon Chow, a senior Forex strategist at Barclays Capital, commented: “Reacting too sluggish and getting overtaken by inflation would be the most unfavorable development. The Israeli currency does not provide any significant carry, despite the increase of 0.25%. There are many currencies that are more interesting.” The central bank reduced the key interest rate to a historical low of 0.5% and bought overseas currencies and administration bonds in order to boost the national economy that shrank 3.2% on a yearly basis in the first three months of this year.

Expansion in the second quarter

The Israeli economy grew 1% on a yearly basis in the second quarter due to a rise of 5.8% in exports. A gauge of the most important economic indicators rose 1.2% last month; the third straight increase. The inflation rate in Israel was at 3.5% in July, while it showed an inflation level of 3.6% in June. Almost 50% of the country’s GDP consists of exports, while the Israeli currency has advanced approximately 3.5% versus the US Dollar since June 30.