Interest-rate hikes: Israel leads the way

Aug 28, 2009

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Central banks may have been "keen to talk up" signs of recovery, said Lionel Laurent in Forbes, but until this week none were willing to express that confidence by raising interest rates. Now Israel has become the first country to do so since the crisis began, adding 0.25% to the record low benchmark rate of 0.5%.

What the commentators said

The bank of Israel "looks to be a trailblazer rather than the first in a closely grouped convoy of central banks embarking on a tightening cycle", said Krishna Guha in the FT. Having shrunk for just six months, the economy is "recovering at a satisfactory pace", said Capital Economics; it grew by an annualised 1% in the second quarter.

The financial system "is in relatively good shape" and household debt is low. Most importantly, inflation has risen above the 1%-3% target band, thanks largely to recent tax hikes.

But Israel is hardly out of the woods. Exports account for half of GDP and a strengthening shekel amid expectations of further rate hikes could hamper the external sector, especially with global growth so subdued. "You need to see real improvements in the world" before raising rates, said David Karsboel of Saxo Bank.

Which countries will eventually follow? Most major Western economies will be in no rush, given deep recessions and scant sign of inflation; few expect the Fed to hike before 2011. Markets expect Norway and Australia to make the first moves, said The Economist.

In both cases banking systems are in solid shape and unemployment has stayed unusually low – in Australia it has "flatlined" at just 5.8%. Moreover, being commodity exporters has provided added impetus of late. Expect Norway, where rates are at just 1.25%, compared to 3.5% in Australia, to move first.

 

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