Bank of Israel Cuts Policy Interest Rate for Second Time this Month

May 27, 2013

The Bank of Israel had implemented six rate cuts of 25 basis points apiece from September 2011 through end-2012 but none during the first four months of 2013.  An unscheduled seventh reduction of 25 bps to 1.5% was announced on May 13 in response to undesirable shekel appreciation and sub-target inflation.  In mid-May, officials also announced plans to intervene in foreign exchange from time to time, should Israeli production of natural gas subject the shekel to unwelcome excessive strength. 

Because the shekel had partly retreated over the past two weeks, most analysts were not looking for a rate change at today’s scheduled policy meeting.  Instead, an eighth rate cut was announced to 1.25%.  The explanation for today’s action again cited sub-target CPI inflation of 0.8%.  The target inflation range is 1-3%, and officials also noted that expected inflation of 1.7% lies somewhat below the target mid-point. Today’s statement cites intensifying monetary stimulus by major central banks and says that today’s decision will reduce Israel’s interest rate premium vis-a-vis the ultra low levels in some major developed economies.  Israel counts on exports to be a major engine of economic growth and needs a competitive shekel therefore.  At 1.25%, the central bank borrowing rate is just 75 bps above its Great Recession low of 0.5%. 

Governor Stanley Fisher, who has been mooted as one of several possible successors to Fed Chairman Bernanke should the latter not get a third term, steps down at the Bank of Israel next month.  Bernanke’s current term ends in January 2014.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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