A Third and Somewhat Unexpected Rate Cut by the Bank of Israel

January 23, 2012

No central bank was quicker than Israel’s in raising interest rates after the Great Recession.  Having slashed such from 4.25% to 0.5% during the downturn, the Bank of Israel began the process of normalization with a 25-bp increase in August 2009.  Nine ensuing rate hikes lifted the benchmark to 3.25% by May of last year.  Since September, the central bank has alternately eased and poised, reducing the interest rate to 3.0% that month, 2.75% at its November meeting and 2.5% today.

A statement on the Bank of Israel website justifies this third easing for several reasons.

  1. Measures of expected CPI inflation hover near the midpoint of the 1-3% target range.
  2. Central bank officials project in-target on-year inflation throughout 2012.
  3. Forecasts of global trade volumes have been scaled back.
  4. House price inflation is not trending lower.
  5. Activity and demand continue to slow.
  6. Confidence indices compiled from surveys of households and businesses indicate that a further slowdown is anticipated.
  7. The shekel has been generally steady.
  8. Interest rates remain low at other major central banks, and no increases seem imminent.

The next interest rate statement is set for February 27.  If the pattern of alternating cuts and no change in rates continues, the 2.5% rate level will be retained at that time.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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