The Bank of Israel said on Monday it would leave its key
lending rate unchanged at 6.3 percent for September, due to
rising inflationary expectations. The central bank's decision
was widely expected. The rate has been lowered in small
increments for 14 months steadily. Since late 1999 the Bank of
Israel has reduced the lending rate in a total of 19
increments from 11.5 percent. In the past two months the
central bank lowered the rate three times.
The bank said in a statement that while inflationary
expectations were within the 2.5-3.5 percent target range for
2001, estimates for 2002 and beyond had risen to "the upper
limit of the long-term target range."
"Thus, the absence of change is consistent with the
achievement of the target for 2001 and the next few years,"
the central bank said. Financial "stability has been achieved
as a result of monetary and fiscal restraint."
Inflation was nil in 2000 but is expected to 2.0-2.5 percent
in 2001. Led by a jump in dollar-linked housing prices, which
have risen due to the weaker shekel against the U.S. currency,
the consumer price index (CPI) rose a higher-than-expected 0.4
percent in July. At the same time, money supply jumped 3.5
percent on the month in July, raising fears of further
Israeli financial markets barely budged after the rate
decision was announced. Stock indices clung to modest gains of
about 0.3 percent, while the dollar remained at 4.23
Still, the government, business leaders and many economists
believe the central bank has room to lower rates further in
light of the tame inflation environment and sinking economic
activity. Minister of Finance Silvan Shalom has argued
strongly for further interest rate cuts.
Israel's gross domestic product (GDP) contracted at a 0.6
percent annual rate in the first half of 2001 from the second
half of 2000 and is forecast to end the year at a 0-1 percent
pace -- a level deemed as recessionary given annual population
growth of more than two percent.
The slowdown in economic activity since last September
continued. Most economic indicators declined in June-July, due
to the worsening security situation.