The Bank of Israel slashed yesterday its benchmark rate by 25 basis points to 1.25 percent, marking the second rate cut this month.
The central bank has cut the interest rate for the second time in two weeks.
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Bank of Israel’s Governor Stanley Move:
Governor Stanley Fischer and his monetary committee cut the interest rate as the bank continues to fight a strong shekel and to tame the slow economic growth.
Bank of Israel had to confront the appreciating shekel as it would affect Israel’s exporters. Last month, the bank tried forex market intervention technique for the first time in almost two years. This action was meant to tame the rising shekel as the currency reached a near two-year strong point against the dollar.
According to the central bank, the major justification to reduce the bench market interest rate is to compress the interest differential with other major economies, thereby limiting the carry-trade pressures on the Shekel.
Things got picked up with the commencement of local natural gas production in late March, reducing Israeli companies’ dependence on costly imports. Besides the possibility of Israel exporting some of the gas has also triggered the strength of shekel.
The central bank also cited the accommodating monetary policy of major central banks in the past two months. Bank of Israel also noted that macroeconomic indicators for Israel exhibit continued moderate growth in the first quarter, but a mixed trend in April.
Housing prices in Israel rose 67 percent between 2008 and 2012, according to Central Bureau of Statistics. The central bank also noted that home prices in Israel rose by 10.5 percent in the 12 months through March. However the central bank feels the housing market demand would moderate in Israel thanks to government’s new tax initiatives.
Bank of Israel observed that inflation slowed to a six-year low of 0.8 percent in April, adding to economic evidence that has enthused policy makers to cut rates. However the central bank feels inflation expectations for the coming year are slightly below the midpoint of the government’s 1 percent to 3 percent target.
Interestingly the Bank of Israel Governor Stanley Fischer was the first central banker to cut interest rates in 2008, when the global economic crisis started. Similarly he takes credit for raising interest rates within one year when he foresaw economic recovery, thereby again becoming first governor to do so.