Bloomberg News

Israel’s Fischer May Face Challenge as Panel Meets on Rates

October 24, 2011

(Updates interest rate swaps in fifth paragraph, adds analyst comment in 11th.)

Oct. 24 (Bloomberg) -- Bank of Israel Governor Stanley Fischer faces his first potential challenge in setting interest rates as a newly appointed monetary policy committee convenes to decide on the benchmark, a task that in the past was his alone.

The committee is expected to hold the lending rate at 3 percent, according to 17 of 20 economists surveyed by Bloomberg. Three expect a quarter-point cut. The Bank of Israel will announce the decision at 5:30 p.m. in Jerusalem.

Last month, Fischer unexpectedly cut the benchmark for the first time in more than two years, citing a “negative turnaround” in the global economy and weakness in Israeli exports. As the six-member monetary policy committee holds its inaugural rates meeting, there are signs that European countries may be reaching a comprehensive accord to address debt problems. Europe is one is Israel’s key export markets.

“We’re less likely to expect a daring move to cut the interest rate in the first decision of the new monetary committee,” said Jonathan Katz, a Jerusalem-based economist for HSBC Holdings Plc. Still, “monetary policy is leaning toward cutting rates and it’s safe to assume that we will see further cuts in the next six months.”

Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, rose to 2.8 percent at 13:57 today, poised for their highest close in a month on speculation that the central bank won’t lower borrowing costs.

‘Better Decisions’

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.

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

‘Fisher in Wrapping’

“It’s always good to have people who view things from other angles and reach a decision together,” Ori Greenfeld, head of the macroeconomic research department at Psagot Investment House Ltd. in Tel Aviv, said by phone.

Some analysts don’t believe the new committee will make a difference in setting policy.

“It’s Fischer in the wrapping of a monetary committee,” said Yaniv Pagot, chief strategist for the Ayalon Group, a holding company with interests in insurance and real estate. “He created it, and when you build something, you build something that’s comfortable for you.”

Pagot says he doesn’t foresee a scenario in which Fischer thinks one way, and the committee decides something else.

--With assistance from Zoya Shilova in Moscow. Editors: Louis Meixler, Ben Holland.

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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