Bank of Israel Raises Benchmark Lending Rate to 4%

The Bank of Israel boosted its benchmark lending rate by a quarter of a percentage point for a second consecutive month in a bid to rein in rising inflation fueled by economic growth.

The rate the bank charges commercial lenders will increase to 4 percent as of Aug. 30, a spokeswoman for the Jerusalem-based bank said today. Nine out of 13 economists surveyed by Bloomberg had forecast a quarter-point rise, while the other four had predicted a half-point increase.

``The increase in the interest rate was necessary due to the quickening of inflation that occurred during the last few months,'' a spokeswoman for the bank said, reading a statement by phone.

The inflation trend during the past four months shows prices rising at a 3.1 percent annual rate, just above the upper limit of the government's 1 percent to 3 percent target range, according to the Central Bureau of Statistics. Gross domestic product grew an annualized 6.1 percent in the second quarter, exceeding economist estimates, after rising 6.2 percent in the first quarter, the bureau said last week.

Inflation Fight

The central bank has battled deflation for much of the past year, cutting interest rates seven times in a bid to weaken the shekel and guide inflation back to the target range. With prices now rising, the central bank is concerned that inflation may overshoot its target.

Bank of Israel Governor Stanley Fischer unexpectedly raised the benchmark lending rate by a quarter of a percentage point last month, saying economic growth and rising global commodities prices risk sparking inflation. That led the shekel to strengthen about 4 percent.

``If the shekel exchange rate remains more or less stable, there will be a further rate hike, due to domestic inflationary pressure,'' Vered Dar, chief economist at Psagot Ofek Investment House Ltd. in Tel Aviv said in a telephone interview following the announcement.

The shekel lost 0.11 percent against the dollar and was trading at 4.1510 shekels at 6:55 p.m. local time. The announcement was made after the close of the Tel Aviv Stock Exchange.

Israeli consumer prices rose 0.3 percent in July from a year ago, the first annual gain since January, as a three-month decline in the shekel lifted the cost of dollar-linked housing.

Rising Prices

The rising prices come as Israel's economy is heading for a fifth year of growth. Unemployment fell to a seasonally adjusted 7.6 percent in the three months through June, its lowest quarterly level in a decade.

Israel's base lending rate dropped below the equivalent U.S. Federal Reserve rate at the end of last year. Except for a few days in 2005, this marks the first time that Israeli lending rates were lower than those in the U.S. The Fed's Open Market Committee has left the benchmark rate at 5.25 percent since June 2006, and a median estimate of 102 economists surveyed by Bloomberg expect the Fed to cut rates by 25 basis points in its next decision on Sept. 19.