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Bank of Israel Governor Stanley Fischer
Photo: Gil Yohanan
Bank of Israel lowers key rate to 2.75%
Monetary Committee prompted to cut interest rates once again due to European debt crisis, growing fears of a possible negative effect on Israeli economy
Fears of recession overcome housing market concerns: The Bank of Israel's Monetary Committee decided Monday to cut interest rates for December by 0.25% to 2.75%.

 

This time, the committee's decision matched most capital market forecasts. Since the end of September, interest rates have been lowered twice, by 0.5% altogether.

 

The main reason for the Monetary Committee's decision to cut the key rate once again was the increasing European debt crisis and the growing fears of a possible negative effect on the Israeli economy.

 

A lower interest rate reduces manufacturers' costs while encouraging consumption, and is expected to contribute to the economic activity and increase growth.

 

On the other hand, lowering the interest rate may lead to another depreciation of the shekel against the US dollar and euro, leading to higher import prices and a higher inflation rate.

 

The Bank of Israel was able to cut interest rates once again, despite the fear of a possible price hike, thanks to the recent relaxation in the inflation area.

 

As a result of the particularly low consumer price index recorded in October (0.1%), the actual inflation rate for the past 12 months fell to 2.7% - within the annual inflation target range set by the government (1-3%).

 

The inflation trend in the past four months is much lower, amounting to an annual rate of only 0.9%. The expected inflation rate for the next 12 months, as estimated by capital market analysts, is also within the target range – totaling 2.3%.

 

For the second time since the Bank of Israel's establishment 57 years ago, the interest rate decision was made by the Monetary Committee rather than by the bank's governor on his own.

 

The Committee, which took over all of the governor's monetary decisions under the new Bank of Israel Law, has six members, three of whom are representatives of the public. The Committee makes its decisions through a vote. In case of a tie, the governor, who heads the Committee, has the right to vote twice.

 

Responses

According to Avraham Novogrodsky, chairman of the Manufacturers Association's economic committee, "The governor must continue lowering the interest rate in light of the growing fears of a serious global recession, which will continue damaging Israeli exports, alongside the local market's weakness."

 

Yehuda Alhadef, president of the Association of Craft and Industry in Israel, says "the business sector has finally received the boost it has been awaiting for months.

 

"Lowering the interest rates is a must in light of the growing debt crisis in Europe, the impending eurozone collapse, the slowdown in Israel's economic activity, the drop in exports and private consumption and the slowdown in the inflation rate.

 

"This move reflects a sound and responsible policy by the central bank, aimed at supporting the business sector's activity and the economy's growth, which is like oxygen for small businesses in general and in the industry in particular."

 

Golan Sapir, Deputy CEO of Sigma Investment House, believes that "the Bank of Israel governor senses the slowdown in the US and the European crisis making their way to Israel.

 

The OECD and Bank of Israel's decisions to cut their growth forecasts, alongside the inflation rate moderation, the small number of real estate deals and the weak financial reports public by retail giants create a real fear that Israel won't be able to withstand the economic challenges and maintain a low unemployment rate."

 

Yair Drori, chief analyst at Tachlit-Discount, estimates that "the interest rate will be cut three or four more times this coming year, in accordance with global economic developments.

 

"The relatively convenient dollar rate and the low inflation rate will allow the governor to continue lowering the interest rate and lead the Israeli economy to a soft landing, on the backdrop of the global crisis."

 

Drori further noted that "the governor's decision to cut the interest rate was made in light of figures pointing to a significant slowdown in growth and the European concerns, which continue to attract the attention of the world in general and of the Bank of Israel in particular."

 

 

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