Continuing higher-than-expected inflation prompted Bank of Israel Governor Prof. Stanley Fischer to raise the interest rate by another quarter of a percent on Monday. The prime lending rate for September was set at 4.25 percent, despite signs of an impending recession.
A higher interest rate tends to slow down the economy by discouraging credit but also is aimed at slowing demand that fuels inflation. Most of the recent inflation has been due to outside causes, particularly the soaring price of crude oil and the resulting increases in the cost of food and energy. However, Fischer has said there are growing signs that some of the inflation is homegrown.
The interest rate several months ago was only 3.25 percent when Israel was enjoying a growing economy with a low consumer price index. Monday's decision to rate increase was expected and had little effect on the shekel, which was valued in Monday's late trading according to the dollar at slightly more than 3.50 shekels.
Inflation has risen nearly two percent beyond the maximum Bank of Israel target of three percent. However, the 15 percent slide in the last month of the cost of crude oil on world markets may bring down the rate of inflation to target levels.
The financial crisis that has swept through the United States the past year has chilled the local economy, slowing down growth from more than five percent to less than two percent on an annual basis.
The financial crisis that has swept through the United States the past year has chilled the local economy.
A wild card in the forecast is the unstable political situation in Israel and the budget. Following the announced resignation of Prime Minister Ehud Olmert and Kadima party leadership primaries next month, the government will become officially "lame-duck," as efforts are made to form a new one. If the new Kadima leader is not successful, elections will be held around March.
The first order of economic business will be the proposed 2009 budget, which the Cabinet narrowly approved in the wee hours of the morning Monday but which all politicians agree has little meaning because of certain changes in the government. In addition, the Histadrut labor union is making waves for a wage increase to offset the high inflation rate, and higher salaries might fuel further inflation.