The Bank of Israel has announced a cut of 75 basis points in its interest rate for January. The new rate will be 1.75%. The new rate is the lowest in the Bank of Israel's history, and the cut is the largest that Stanley Fischer has made since becoming governor of the bank in 2005.
Most market analysts had expected a cut of 50 to 75 basis points, with some even predicting a full 100 basis point cut. Sources inform "Globes" that Fischer had in fact planned a 100 basis point cut, but that the fighting in the Gaza Strip caused him to moderate his intentions. On events in the Gaza Strip and southern Israel, the bank's statement said, "The security-related developments of the last few days have opposing effects. On the one hand they increase geopolitical uncertainty in Israel, and on the other they have the potential to impact negatively on real activity."
In its statement, the central bank said the reduction of the interest rate for January would help strengthen the Israeli economy’s ability to cope with the implications of the global economic crisis and support real activity. It said the decision was consistent with the return of inflation to the target range of 1-3% within the next few months. <
On inflation, the central bank expects prices to continue falling into 2009. "These forecasts indicate a return to within the target inflation range as early as in the first third of 2009, although the inflation rate is expected to fall below the target range later in the year," it said.
The announcement also cited interest rate reductions in leading economies, in some cases to unprecedentedly low levels, with further cuts expected.
"The Bank of Israel will continue to monitor Israeli and worldwide economic developments closely, and will take whatever steps are necessary to support the stability of the financial system and to encourage employment and growth, as long as inflation continues to decline towards and achieve the price stability target," the statement concluded.
Ori Yehudai, chairman of the Manufacturers Association economics committee, and president and CEO of Frutarom Industries (TASE: FRUT; LSE:FRUT), welcomed the Bank of Israel's decision. He called on Governor of the Bank of Israel Stanley Fischer to accelerate the pace of interest rate cuts to bring Israeli rates into line with the global trend, in order to make available cheaper credit and strengthen the ability of the Israeli economy to withstand the global economic slowdown.
Yehudai said that there was a "governmental vacuum" in dealing with the most pressing problem of Israeli business - access to credit.
Published by Globes [online], Israel business news - www.globes.co.il - on December 29, 2008
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