Turning Point in Israeli Monetary Policy

September 26, 2011

The Bank of Israel surprised analysts with its first announced benchmark interest rate cut since March 2009.  In eight steps during the Great Recession, the key Israeli rate was slashed by 375 basis points from a prior cyclical high of 4.25%.  Israel was also aggressive in tightening subsequently.  A hike from 0.5% to 0.75% on August 25, 2009, was the earliest increase by any central bank following the recession.  The benchmark was lifted by 75 basis points in 2009, another 75 bps in 2010, and 125 bps during the first five months of 2011, and the 3.25% level from late May until now had been only 100 bps below the prior cyclical peak. 

Israel’s central bank continues to be a bellwether, and the message in today’s rate cut back to 3.0% is that global winds have again changed sufficiently to affect even economies that have grown at a healthy rate.  Bank of Israel staff now predict a 3.2% rise of GDP next year, revising their prior forecast of 3.9%.  Actual inflation of 3.4% remains above the 1-3% target but is down from 4.3% five months ago.  That drop and shifting global circumstances have depressed expected CPI inflation over the coming 12 months to 2.3%, which is well within target and constituting a 19-month low. 

A statement from Bank of Israel Governor Fischer also cites further moderation of house price pressures and policy easings by some other major central bank authorities.  In summary, the statement calls today’s action a move “to minimize the negative effect on Israel’s economy of the slowdown in activity and the increased level of uncertainty in the global economy.”  No bias regarding the next rate change or clue about its likely timing was provided.  The next interest rate announcement is scheduled for October 24.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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