Bloomberg News

Bank of Israel Cuts Rate for Second Time in Three Months

November 29, 2011

(Adds context on policy history starting in third paragraph.)

Nov. 29 (Bloomberg) -- The Bank of Israel cut its benchmark interest rate for the second time in three months to cushion the economy from the impact of a European debt crisis that the central bank said is “becoming more severe and is spreading.”

The monetary policy committee lowered the rate by a quarter percentage point to 2.75 percent, the Jerusalem-based central bank said on its website yesterday. The move matched the forecast of all but four of 21 economists surveyed by Bloomberg News, with the rest predicting no change.

Governor Stanley Fischer’s success in restraining consumer prices has given the Bank of Israel flexibility to respond to the crisis in Europe, one of its two biggest export markets, along with the U.S. The bank, the first to raise rates from a record low in 2009 as the global recession ended, said yesterday that inflation is “more firmly” within its target range.

“The rate cut is due only to what is happening abroad,” said Ori Greenfeld, head of macroeconomics at Tel Aviv-based Psagot Investment House Ltd. “If you look at the Bank of Israel’s forecasts for the domestic economy, there is no reason to lower the interest rate.”

Israel has been joined by Australia, Brazil, Denmark, Romania, Serbia, Indonesia, Georgia and Pakistan in lowering interest rates since late August in response to the European turmoil. Chile, Mexico, Norway, Peru, Poland and Sweden are also forecast by JPMorgan Chase & Co. to lower borrowing costs by the end of the first quarter.

Rate Swaps

Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, dropped six basis points to 2.60 percent, the lowest since September 2010. The yield on the 3.5 percent bond due September 2013 fell four basis points to 2.72 percent at the 4:30 p.m. close yesterday. The shekel strengthened against the dollar by 0.4 percent to 3.7780 shekels at 7:11 p.m. in Tel Aviv.

Yesterday’s meeting was the second where the decision wasn’t made by Fischer alone, after he championed an overhaul in the bank’s structure that empowers a committee to oversee policy. Fischer, 68, a former deputy chief of the International Monetary Fund, said this month that Israel’s economy can weather the European crisis by sticking to “responsible” policies, and urged against any “surrender to populism.”

Netanyahu’s Message

Prime Minister Benjamin Netanyahu told Fischer in a meeting yesterday that maintaining fiscal discipline has helped the economy grow and left Israel well prepared to deal with global challenges.

The Organization for Economic Cooperation and Development said in a report released yesterday that growing doubts about the survival of Europe’s monetary union has caused global growth to stall and represents the main risk to the world economy.

“The debt crisis in Europe is becoming more severe and is spreading to other countries,” the Bank of Israel said in its statement. “The risk of Europe sliding into a recession and a significant slowdown in the global economy has risen. These negative developments are already affecting the Israeli economy and their effect is expected to intensify.”

About 40 percent of Israel’s gross domestic product is tied to exports. The OECD cut its economic growth forecast for Israel for 2012 to 2.9 percent from its May estimate of 4.7 percent, according to the report. The group also reduced its projection for this year to 4.7 percent from 5.4 percent. Growth will rebound to 4.7 percent in 2013, the Paris-based OECD said.

Israel Outperforming

Even with the reductions, Israel’s expansion rate will exceed all but six of the OECD’s 34 members next year, according to the projections. The pace is almost double the 1.6 percent forecast for the group as a whole, the OECD report showed.

The Bank of Israel predicts 4.7 percent growth for this year and 3.2 percent for next year.

Israeli inflation slowed to 2.7 percent in October, within the government’s target of 1 percent to 3 percent for a second month. Housing purchase prices, which are reported alongside the consumer price index and are not included in it, dropped 0.2 percent in August-September, the last period measured, the first decline since November-December 2008.

--With assistance from Zoya Shilova in Moscow. Editors: Louis Meixler, Chris Anstey

To contact the reporter on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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