Dei'ah veDibur - Information & Insight

A Window into the Chareidi World

10 Ellul 5761 - August 29, 2001 | Mordecai Plaut, director Published Weekly








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Bank of Israel keeps Interest Rate Unchanged
by Yated Ne'eman Staff

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 inflation.

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 shekels.

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.


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