28.09.2010 Uncategorized No Comments

Interest rates in Israel up, but why?

The Bank of Israel put interest rates up last night by 0.25 basis points to 2%.

This decision was expected, but not popular. There were two considerations the Governor of the bank Stanley Fischer had to think about.

1. Inflation – in particular house prices. House prices are showing double digit growth, and is hence reflected in the high inflation figures we are currently seeing. One of the best ways to reduce inflation is to put interest rates up. One of the reasons house prices are seeing such growth is because more and more people can buy thanks to the low interest for their mortgage. I am of the opinion that interest rates will have to go up substantially more in order to effect this housing ‘bubble’ we are currently witnessing.

2. The exchange rate. In theory, putting up interest rates in a country will strengthen that countries currency. In the case of Israel this is a huge consideration. The shekel is already very strong, and the increase in interest rates, coupled with other interest rates around the world staying very low is only going to strengthen the shekel even more. Our economy in Israel relies heavily on exports, and exporters rely on a weak shekel to make their goods affordable to their customers. The stronger the shekel becomes, the more expensive it is for countries to buy our goods, which increases the chances of them looking elsewhere for the same goods.

The Bank of Israel had a difficult decision to make, and has decided to try and curb the house price situation rather than helping the exporters. They probably feel they can help exporters by intervening in the foreign exchange market, but lets be honest – that hasn’t worked for a while!

I believe this is going to be a long running situation and a similar decision will have to be made every month for the next few years!

write your sentence her

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