News Column

Bank of Israel surprises with further rate cut

August 25, 2014

By Moshe Golan, Globes, Tel Aviv, Israel

Aug. 25--The Bank of Israel Monetary Committee, headed by Governor Dr. Karnit Flug, has reduced the interest rate for September by 25 basis points (0.25%) to 0.25%. This is the second month running that the bank has reduced the interest rate by 0.25% and most analysts had predicted that the Bank of Israel would leave the interest rate unchanged. The interest rate is at an historic low


On the foreign exchange market, the shekel-dollar exchange rate, which has been rising recently, has broken through what was considered to be a resistance level at NIS 3.55/$, and is currently at NIS 3.569/$.

In stating the main reasons behind its decision, the Bank of Israel said, "There was an additional decline in the inflation environment this month. Inflation measured over the preceding 12 months declined to 0.3%, and the decline in inflation expectations for all terms continued. Forecasters' projections for the coming year, and 1-year expectations derived from the capital market, are very near the lower bound of the target range, and expectations derived from banks' internal interest rates declined below the range."

Discussing falling growth the Bank of Israel said, "Based on the first estimate of second quarter national accounts data, there was a further slowdown in economic growth, particularly in goods exports, even before the deterioration in the security situation. There was some increase in the growth rate of business sector product compared to previous quarters. Labor market data indicate a halt to the improvement in employment. Data which have become available so far do not yet allow the assessment of the loss of GDP that will derive from the fighting, which still continues, but it occurs against the background of a slowdown in growth of the economy, and an environment of low economic growth worldwide. In particular, an extended negative impact is expected in tourism, and a negative impact, apparently temporary, in private consumption."

On the shekel the Bank of Israel said, "The shekel weakened by 1.7% this month in terms of the nominal effective exchange rate. Continued depreciation will support a recovery in exports and in the tradable sector. The shekel has appreciated by about 0.4% since the beginning of the year."

The Bank of Israel is also concerned about worldwide developments, "The global picture continues to indicate limited recovery, with renewed growth in the US and moderation in Europe and Japan. Major central banks are expected to continue accommodative monetary policy for an extended period of time."

Finally on home prices the Bank of Israel said, "Home prices increased by 7.7% in the previous 12 months, and the rate of new mortgages taken out remains elevated. The uncertainty regarding the application of a zero VAT rate on new homes continues to have an impact on housing market activity."


(c)2014 the Globes (Tel Aviv, Israel)

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Source: Globes (Tel Aviv)

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