Bank of Israel Governor Stanley Fischer on Monday announced that the bank has raised its growth estimate for Israel’s economy this year to 3.1 percent from 2.8%, citing the rise as a key reason for holding its benchmark lending rate unchanged at 2.5% for the second month in a row.
“The indicators that became available this month indicate a stable rate of increase of activity at the levels recorded in the fourth quarter of 2011,” the central bank said in its monthly rates decision statement. “Estimated expectations of economic activity have improved and they indicate some improvement in the rate of growth.”
Among the factors that went into the decision to maintain the 2.5% lending rate were positive developments in international markets, as well as an improved forecast for Israel’s market performance for 2012 and 2013. According to the central bank, in 2013 Israel’s economy will experience an even faster growth rate of 3.5%, and gross domestic product will stand at an all time high of $33,000 per head.
The Bank of Israel’s economists estimated the key rate would be 2.5% in the first quarter of 2013. It had previously projected one more rate increase this year.
Inflation, meanwhile, is forecast to rise to a rate of 2.6% in the next year from an annual rate of 1.7% in February. Fischer cited the expanding deficit of the national budget for 2012, which has already missed the goal set by the government, in addition to potential inflation caused by increased costs of food, gas and electricity, which comprise the core of his concern, as reasons for the increased inflation estimates.
This is due to the hike in global oil prices, which have risen in three months by 14%, from $110 per barrel of Brent Crude oil to $130 per barrel.
Prime Minister Benjamin Netanyahu has in the past announced his goal of raising Israel’s GDP to surpass that of France and Great Britain. However, despite the optimistic growth estimations, the standard of living costs per person will also rise in the next two years, due to the increasing cost of goods.
On the unemployment front, until three months ago the Bank of Israel forecast a rate of 6.4% for 2012, but now expects that to drop to 5.8%, representing 183,000 unemployed people. In 2013, the unemployment rate is expected to drop slightly further to 5.7%, representing 180,000 people.
Finally, according to the Bank of Israel report, Israeli exports will only increase in 2012 by 3%, while import rates will increase by an almost negligible 0.7%, likely due to the economic crisis that is sending shock waves through European markets.