Interest rates have been raised by a cumulative 200 basis points, to 2.5%, since the first move in the current tightening cycle took effect in September 2009. But real rates, based on forecast 12-month inflation, still remain negative. Rapidly rising house prices-up by over 17% in 2010-remain a key concern. The authorities have imposed stiffer criteria on mortgage lending, in an attempt to reduce speculative activity, together with other measures aimed at dampening the overheated housing market. However, the overall policy stance seems to be shifting inexorably in the direction of accelerated tightening, particularly as global pricing pressures feed through to the domestic economy and the volatile regional background makes the New Israeli shekel less attractive to foreign investors. We forecast an additional 100-basis-point increase in the policy rate over the remainder of 2011, taking it to 3.5% by December. This compares with our previous forecast of 3%. Monetary policy will continue to be tightened in 2012-15, as capacity constraints become more pronounced. We expect the policy rate to reach 6.25% in 2015.