The Bank of Israel has become the first central bank in the economically developed world to raise its interest rates.
The head of the Central Bank of Israel decided to raise interest rates to 0.75%, hence becoming the first central bank of any economically developed country to do so since the start of the recession.
Professor Stanly Fisher, Governor of the Bank of Israel (BoI), has announced that the bank’s interest rates will be raised from 0.25% to 0.75%.
Though Fisher and the Israeli Finance Minister Yuval Steinitz have on numerous occasions warned that the crisis is not over, the BoI commented that "the most recent data on real activity in Israel strengthen the assessment that there has been a turnaround, although there is great uncertainty regarding the expected rate of growth."
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"The interest rates of the world’s leading banks are expected to remain unchanged until the end of the year, and possibly even to the middle of 2010. However, unlike in Israel, inflation in those countries is expected to remain low both this year and the next." the BoI said.
"It is thought that the reduction in twelve-month inflation projections, is due not only to the continued widening of the output gap, but also to expectations that the Bank of Israel will increase the interest rate in the next few months," the bank said in a statement regarding its decision.
"Fluctuations may create a massive flow of capital to the strong shekel, resulting in disproportionate harm to exports," Uriel Lynn, President of Chamber of Commerce, said in response to publication of interest rate economy.
Recently, Fisher’s use of public funds to shore up the economy have come under heavy criticism.
His plan to purchase large amounts of American capital has strengthened the value of the dollar against the Shekel and stabilized Israel’s export industry. But some believe the moves have cost the public too much. Furthermore, with the knowledge of the bank’s plan in the public domain, some believe it has left Israel vulnerable to price inflation by foreign currency speculators.
Fisher is also negotiating with the Israeli parliament to approve a new Bank of Israel Law. It will place special emphasis on the independence of the bank and will allow the Governor to serve as economic advisor to the government on currency and other economic matters.
Fisher, prior to taking up his position as governor in May 2005, served as Head of the Department of Economics at Massachusetts Institute of Technology before joining the International Monetary Fund in 1994. He then became First Deputy Managing Director in 2001, before moving on to the private banking world and becoming Vice Chairman of Citigroup.