Governor of the Bank of Israel Prof. Stanley Fischer today cut the interest rate for March by 25 basis points to 0.75%.
The decision apparently means that he has decided, at least for now, to halt or postpone continued interest rate cuts in order to keep some ammunition in reserve.
Most economists believed that the current economic situation required a much greater interest rate cut, given the severe recession coupled with the beginning of deflation, and the still low shekel-dollar exchange rate. Any doubts about the seriousness of the situation ended with the economic figures published over the last couple of days.
Central Bureau of Statistics data indicate that Israel has been in recession for five months, and that GDP shrank by 0.5% in the fourth quarter of 2008. The situation has only worsened since then.
The Bank of Israel also narrowed the interest rate corridor in the credit window and the commercial bank deposit window from plus/minus 0.5% to plus/minus 0.25%.
The Bank of Israel noted that 12-month inflation expectations are now below 0.5%, well below the 1-3% inflation target. The only effective way to help the economy survive is a steep interest rate cut, since Fischer is alone on the battlefield, with no government, no budget, and no finance minister.
Published by Globes [online], Israel business news - www.globes-online.com - on February 23, 2009
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