Israeli Interest Rate Reduction

December 25, 2012

The Bank of Israel’s benchmark policy interest rate was cut Money to 1.75% from 2.0%.  Analysts had been split over whether another cut would be implemented or if, as in November, policymakers would choose to change their interest rate.  This was the sixth rate reduction of the cycle.  Earlier moves, all by 25 basis points, were announced in September and November of 2011 and January, June, and October of this year.  From a Great Recession low of 0.50% at the start of 2009, the interest rate had been lifted by 75 bps in both 2009 and 2010 and by 125 bps over the first five months of 2011.

A new statement from Bank of Israel authorities justified the latest interest rate decision on several grounds:

  • Economic growth continues to slow.  Projected GDP expansion next year was revised downward further to 2.8% (excluding natural gas output) from 3.0% and 3.4% just a couple of months ago.  Natural gas production is not expected to boost jobs much.
  • Shekel appreciation is creating a growth headwind.
  • Other central banks like the Fed have eased monetary stances recently.
  • Global downside economic risks persist.
  • CPI inflation of 1.4% in the year to November has dipped under the central bank 1-3% target mid-point and is projected to stay in target.
  • Housing market inflation from lower interest rates will be limited because of the imposition last month of LTV ratio limitations on mortgage finance.

The first interest rate announcement of 2013 is set for January 28.  A seventh interest rate cut sometime in the future remains conditionally possible if inflation and growth continue to trend lower.  A move in January seems doubtful, as it will take more than a month to ascertain the economy’s response to this latest move.

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



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