Israeli Central Bank Rate Cut

November 28, 2011

The Bank of Israel reduced its key interest rate by 25 basis points for the second time since September 26th.  Starting in August 2009 from a recessionary base of 0.50%, the rate had been raised by 75 bps that year, another 75 bps in 2010, and 125 bps in January-May of 2011 to a peak of 3.25%. Several factors justified this second easing.

  1. In-target CPI inflation of 2.7%.
  2. Expected inflation closer to the target midpoint of 2%.
  3. Lessening house price inflation.
  4. Expected slower economic growth of 3.2% next year after 4.7% in 2011.
  5. Risks from Europe: “The debt crisis in Europe is becoming more severe and is spreading to other countries, and there is growing concern over its potentially strong impact on the global economy.”
  6. Other central banks, including the ECB, have cut rates and are likely to do so again.

One potential future constraint on Israeli monetary officials, who not decide policy by committee vote instead of deferring to the judgement of the bank’s governor, is the shekel’s strength.  Since the October meeting, Israel’s currency moved lower against the dollar in close tandem with the euro. As for other future policy guides, “the Bank will use the tools available to it to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, including keeping a close watch on developments in the assets market, and especially in the housing market.”

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



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