Inflation in Israel Surges

Israel's central bank faces a dilemma.

Published: March 17th 2011
in Economics » Israel

Governor of the Israeli central bank, Stanley Fischer

The inflation rate


Israel’s economy is on the rise, having grown by an annual pace of 7.8 per-cent during the last quarter of 2010.


Fast growing economies usually bear a price, and that price is high inflation rates. The Israeli government’s economic policy is to keep the inflation rate at an annual pace of 1-3 per-cent.


However, the inflation pace in February, 2011 was 0.3 percent, much higher than the early analysts' expectations. At the current pace, Israel may end the 2011 fiscal year with an average inflation of 4.2 per cent.


Bad news for the local economy


High inflation rates reduce the collective purchasing power of citizens, can create artificially high prices in some sectors and, in the long term, can lead to economic uncertainties and instabilities.


The central bank dilemma


In order to deal with high inflation rates, the central bank might consider increasing the basic interest rate in the country. Higher interest rates cool the economy, as it encourages people to save more and discourages people from taking long term loans.


According to this theory, if the basic interest will increase, then the inflation pace will stabilize.


Other economists are against any type of market intervention from the central bank. If the basic interest rate does increase, then mortgage holders will have to pay more. They believe that the current inflation is a world phenomenon where energy and food prices are rapidly surging but has nothing to do with the local Israeli economy.


In addition, economists believe that increasing the basic interest rate will weaken the US Dollar which will negatively affect the export sector – bad news for the Israeli economy.


Stanley Fischer


Fischer is the governor of the Israeli central bank and is well aware of the advantages and disadvantage of higher basic interest rates. It’s believed that Fischer might increase the basic interest rate by only 0.25 per cent, which will provide a clear signal that he’s determined to control the inflation monster. Should the US Dollar weaken, Fischer will continue supporting the exchange rates artificially, same as he’s been doing for the last three years.

Related articles: (Inflation, Israel, Economy, Stanley Fischer, )

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