Interest rates have been raised by a cumulative 150 basis points since the first move in the current tightening cycle took effect in September 2009. However, the key rate-at 2% in December-is still 225 basis points below its October 2008 peak. Real rates, based on forecast 12-month inflation, also remain negative. Rapidly rising house prices-up by 20% over the past 12 months-remain a key concern for the Bank of Israel. The central bank has strengthened mortgage lending criteria, in an attempt to counter speculative activity in the housing market, as well as gradually raising interest rates. We forecast an additional 100-basis-point increase in the base rate over the next 12 months, taking it to 3% by the end of 2011. Monetary policy will become increasingly restrictive in 2012-15, as growth accelerates and capacity constraints become more pronounced. We expect monetary tightening over the latter part of the forecast period to be front-loaded, with a 150-basis-point jump in 2012 followed by 50-basis-point increases in each of the next three years. On this basis, the policy rate will peak at 6% in 2015.