Governor of the Bank of Israel Prof. Stanley Fischer cut the interest rate by 75 basis points to an all-time low of 1%.
The move was in line with most economists' forecasts, although as pessimistic economic indicators piled up in recent days, some economists saw room for a full 1% cut drop in the interest rate. Earlier predictions had been for a rate cut of 0.5%.
The Bank of Israel's decision was based on reasons similar to those of its other rate cuts in recent months. The Bank of Israel said that falling inflation and a sharply lower economic growth forecast led to its decision, and it added that many central banks have cut their interest rates to unprecedentedly low levels while capital markets expect even more cuts in a number of leading economies.
This week the Bank of Israel lowered its 2009 economic forecast for Israel to negative 0.2%, from a gain of 1.5% in its previous forecast.
The central bank said that with global economic growth forecasts dropping, "the effects of the global crisis on real economic activity in Israel are evident, with data indicating a marked decline in demand and economic activity". It added that world trade, which exerts a major influence on domestic activity, has dropped, and is expected to fall further.
The average of forecasters' inflation expectations for the next twelve months and expectations calculated from the capital market average are below the inflation target range of 1-3% a year.
While slowing growth and falling inflation have been mentioned in the past, the pace seems to be accelerating, leading Merrill Lynch, in its most recent review of Israel's economy, to describe a "hard landing" ahead. Macroeconomic trends increasingly support Merrill's forecast of negative economic growth in each of the last two quarters of 2009, meeting a classical definition of recession.
The Bank of Israel also commented on government spending, saying, "Government expenditure increased sharply and unexpectedly in December, and exceeded the path consistent with the achievement of a deficit below the ceiling of 1.6% of GDP by NIS 4.4 billion. Thus, 12.7% of the total expenditure in 2008 was spent in December. The total deficit in 2008 came to 2.1% of GDP, above the ceiling. This resulted from a shortfall of NIS 5 billion in tax revenues. Indirect tax revenues were 10.5% lower in the fourth quarter of 2008 than in the fourth quarter of 2007 in real terms. Over the same period direct tax revenues were a real 16.1% lower than a year earlier.
The interest rate decision is the sixth interest rate cut in a row. The rate has been slashed 3.25% in less than four months.
Published by Globes [online], Israel business news - www.globes-online.com - on January 26, 2009
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