Because of rapid dollar gain?
No, even though the dollar has gained 4.2% since the beginning of the year after a 4.5% gain in December, this is not the reason for the interest rate hike. Bank of Israel has been explaining in no uncertain terms for seven years that the bank has no exchange rate target or interest in affecting the rate.
In the past decade the economy has gradually shifted to a completely open currency regime in which the exchange rate is determined by market forces. The central bank only has an inflation target and interest rates are the key instrument the bank uses to maintain price stability.
The dollar gain, in and of itself, is not a reason to raise or lower interest rates. The only reason investors tie the dollar gain to the rate hike is concern the exchange rate rise will lead to continuous price hikes ¿ which would force Bank of Israel to raise interest rates.
Because of huge January CPI increase?
No, despite the fact that the January index is the highest since 1993, it contains no reason to raise interest rates. On the contrary, if we remember that the dollar gained 9.6% in December and January, then we see a mere 1.1% CPI as reinforcing estimates there is no inflationary pressure on the Israeli economy to date.
The January index rise reflects mostly ¿technical¿ increases in items that are dollar-denominated for various reasons or automatically updated by the Central Bureau of Statistics in keeping with the dollar rate. This is not an index that reflects inflationary pressure or an index that reflects loss of control over price stability.