By Steven Scheer
JERUSALEM, April 12 (Reuters) - Israeli interest rates are currently low and still have room to rise further since inflation remains high, a senior Bank of Israel official said on Tuesday.
But financial markets should not try to determine a pattern in the pace or size of each move, said Barry Topf, head of the market operations division at the central bank.
"The human urge is for pattern recognition but it is simply not useful in interpreting monetary policy," Topf said in an interview with Reuters. "Obviously, we don't want to take abrupt steps but we want to take steps we feel are appropriate."
The Bank of Israel on March 28 boosted its benchmark rate by a more than expected half-point to 3 percent for its third straight monthly move and ninth since August 2009.
Minutes of the decision showed a split among bank officials, with two of the four lobbying for a quarter-point hike plus further measures to cool the housing market. [ID:nLDE73A0U0]
"There could be macro-prudential steps in the future. We are weighing them, considering them and formulating them but we weigh and design lots of things that don't necessarily get done," said Topf, who last week was named senior adviser on monetary policy to Bank of Israel Governor Stanley Fischer.
Topf will also be a voting member of the new monetary policy council currently being formulated. He defended the half-point increase as necessary to maintain the Bank of Israel's credibility in fighting inflation.
"The fact we raised rates 50 basis points was a surprise but one has to look where the interest rate is at the moment. At 3 percent, they are still low and monetary policy is still supportive of economic activity," he said, pointing to real rates being zero to slightly negative.
Annual inflation reached a 4.2 percent rate in February and is forecast to have risen to a 28-month peak of 4.4 percent in March. Inflation expectations published last month also indicated inflation would stay near 4 percent for the next year to stay above a government target of 1 to 3 percent.
"Inflation is currently higher than we like it to be," Topf said. "But we fully expect it to come down in the medium term, which is what we are aiming for."
Inflation expectations "have definitely gone down since the last interest rate increase", he said without elaborating.
The Bank of Israel will next publish data on inflation expectations for the coming years on April 21.
Topf said the process of bringing rates to a more normal level is a slow and gradual process and a function of economic developments. Most analysts project another one-point of tightening this year to 4 percent and reaching more than 5 percent in 2012. They peaked at 4.25 percent in 2008.
"The pace is not necessarily fixed," he said. "We are looking ahead and not just responding month by month to the latest CPI figures but trying to see how they (rates) will affect the economy down the road."
Rate moves, he said, impact housing prices in a lag of up to a year. Housing prices have jumped over the past two years but Topf said there were some signs the market is starting to cool. However, "there is an increase in worries about oil and commodity prices."
The Bank of Israel's new six-member monetary policy council is expected to start in the next few months and Topf expects there to be a better degree of accountability and transparency to the public. At present, the governor alone takes monetary policy decisions. (Editing by Stephen Nisbet)