The Bank of Israel's Monetary Committee decided Monday to reduce the interest rate for February by 0.25% to 2.5%, against most early estimates.
The central bank lowered its key rate three times since September 2011 at a total rate of 0.75%.
The main reason for the Monetary Committee's decision was growing fears that the European debt crisis would make its way to Israel and have a negative effect on the economic activity.
Lowering interest rates reduces manufacturers' costs, while encouraging consumption, thereby boosting economic activity and increasing growth.
The Bank of Israel was able to reduce the interest rate once again, despite fears that the move would push prices up, due to the recent drop in the inflation rate .
Figures released by the Central Bureau of Statistics last week revealed that the actual inflation rate for the past 12 month (the December 2011 consumer price index compared to the December 2010 index) now totals 2.2% and is the lowest inflation rate recorded in Israel in the past five years.
The inflation trend in the past four months is even lower, amounting to an annual rate of only 1.5%.
According to recent figures released by the Bank of Israel, the expected inflation rate for the next 12 months – as predicted by capital market analysts – has positioned itself at an average level of 2.3%.
These data show that both the actual inflation rate and the expected inflation rate are within the annual inflation target range set by the government (1-3%).
Monday's unanimous decision was made by the central bank's Monetary Committee, which took over all of the governor's monetary decisions under the new Bank of Israel Law.
The committee 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