The gap between Israel’s benchmark interest rate and those in major economies is spurring investment in the country’s bonds, according to Bank of Israel Governor Stanley Fischer.
The benchmark rate of 1.75 percent is “very low,” he said at a conference in Tel Aviv today. “Not low enough compared to the international arena. All major economies worldwide -- the U.S., England, Europe and Japan -- surely have a lower interest rate compared to us, and this is causing people to invest in Israeli bonds, even for weeks.”
The Bank of Israel has gradually reduced the borrowing rate from 3.25 percent in 2011 in an effort to shore up the economy amid the European debt crisis. The monetary committee, led by Fischer, 69, held the rate at 1.75 percent last month as policy makers focused more on rising home prices than on the pace of recovery in the global economy.
Israel can’t allow a large gap to develop with other countries’ interest rates, because that would encourage capital inflows and excessive shekel appreciation, Fischer said March 13. He predicted then that interest rates would begin to rise by the beginning of 2015.
The shekel rose 0.2 percent against the dollar, trading at 3.6183 at 5:30 p.m. in Tel Aviv, versus 3.6271 the previous trading day.
The Bank of Israel said that it had “acted” in the foreign currency market on April 8 for the first time since July 2011, after traders said the central bank bought about $100 million that day.
The Bank of Israel said that it took the steps in accordance with a declared policy of operating in case of “irregular swings in the exchange rate that aren’t in line with fundamental economic conditions or when the foreign currency market isn’t operating properly.” Reserves, which stood at $77 billion at the end of March, more than doubled as a result of central bank purchases, which took place between 2008 and 2011.
Israeli growth may slow to 2.8 percent this year from 3.2 percent in 2012, excluding first time natural-gas revenues, according to a central bank forecast. In 2011, the economy expanded by 4.6 percent.
Fischer, who’s leaving his post in June, said yesterday he supports Finance Minister Yair Lapid’s plan to raise the 2014 budget target to 3 percent of gross domestic product from the previously planned 2.75 percent.
Lapid yesterday presented Prime Minister Benjamin Netanyahu with his 2013-2014 budget proposal, which must be approved by August.
The finance minister told that same Tel Aviv conference that defense chiefs are cooperating with his efforts to cut defense spending, and offered to “roll out a red carpet” to greet multinationals interested in setting up shop in Israel.
Defense outlays are the biggest part of the country’s budget, accounting for about one-fifth of output. In the past, Israeli defense officials have balked at spending cuts, citing Israel’s many security challenges, but Fischer said today the military is not “without redundancy and inefficiency.”
While pledging to work for the Israeli taxpayer, the finance minister sought to reassure the business community that he was “not anti-business.”
Should a large multinational corporation want to set up a plant in Israel, the government will not only give it every possible tax break, “but I will personally go to Ben-Gurion Airport and roll out a red carpet for them,” he said.
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