Bloomberg News

Israel Keeps Rate Unchanged as European Aid Plans Develop

October 24, 2011

(Updates with analyst comment in third paragraph.)

Oct. 24 (Bloomberg) -- The Bank of Israel left the benchmark lending rate unchanged amid greater optimism about the global economy.

The newly named monetary policy committee held the rate at 3 percent, the Jerusalem-based central bank said on its website today. Seventeen of the 20 economists surveyed by Bloomberg forecast the decision, while the remainder predicted a quarter- point cut. It was the first time in the country’s history that the decision was made by a group and not the governor alone.

“There are increased signs that the U.S. will be able to avoid an additional recession,” said Ori Greenfeld, head of the macroeconomic research department at Psagot Investment House Ltd. in Tel Aviv. “Decision makers in Europe have increased efforts to find a solution to the crisis.”

The central bank last month cut the benchmark rate for the first time in more than two years, citing a “negative turnaround” in the global economy. European leaders, meeting this week, are inching toward a resolution of the region’s debt crisis. The U.S. economy probably grew 2.5 percent in the third quarter, the fastest pace this year, according to the median forecast of 80 economists surveyed by Bloomberg News.

About 40 percent of the Israeli economy is made up of exports, with the U.S. and Europe being the largest markets.

“Maintaining the interest rate at its current levels leaves the Bank of Israel room to respond to events in the global and local economies,” the central bank said in its statement.

Rate Swaps

Two-year Israeli interest-rate swaps, an indicator of investor expectations for rates over the period, fell less than one basis point to 2.78 percent at 6:10 p.m., near its highest in a month.

Israeli growth eased to 3.7 percent in the second quarter, from 4.7 percent in the previous three months. The Bank of Israel cut its forecast for economic growth this year and next on Sept. 22, citing increased uncertainty about the global economy and a decline in the rate of growth in world trade. The economy will expand 4.7 percent in 2011 and 3.2 percent in 2012, the central bank said, lowering its forecasts from 4.8 percent and 3.9 percent.

The central bank said in its statement today that indicators that became available this month show that economic activity expanded, though at a slower pace than in 2010 and the first quarter of 2011. Tax revenue is likely to be slightly lower than the budget forecast, and the budget deficit for this year will be close to the deficit ceiling of 3 percent of gross domestic product, it said.

‘Better Decisions’

Fischer insisted before accepting a second term last year that parliament approve the formation of a policy committee, a step that governments had been discussing for more than a decade. He said that “committees make better decisions than a single individual.” The Cabinet named the committee members on Oct. 9.

Aside from Fischer, the monetary committee includes Deputy Governor Karnit Flug and Special Advisor to the Governor Barry Topf. The members from outside the central bank are Hebrew University of Jerusalem Professor of Economics Emeritus Reuben Gronau, Provost of the Interdisciplinary Center Herzliya Rafi Melnick, and Interdisciplinary Center-Herzliya Professor of Economics Alex Cukierman.

Inflation slowed to 2.9 percent last month, falling within the government’s target of 1 percent to 3 percent for the first time this year. Expectations for inflation in the next 12 months eased to 2.2 percent, the lowest since February 2010, according to a Bank of Israel survey released Oct. 18.

The two-year break-even rate, which reflects the rate of inflation traders expect, increased for a second day, surging nine basis points to 182, implying an average annual inflation rate of 1.81 percent.

--With assistance from Zoya Shilova in Moscow. Editors: Louis Meixler, Heather Langan, Karl Maier.

To contact the reporter on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.


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