BOI cuts interest rate, joins global stimulus
The Bank of Israel cut the benchmark interest rate for the first time in five months on Monday, joining central banks from the US to China in providing stimulus for their economies as inflation and growth slow amid the global turmoil.
The central bank’s monetary policy committee, led by Governor Stanley Fischer, reduced the rate by a quarterpoint to 2.25 percent, the bank said on its website. Sixteen out of 23 economists surveyed by Bloomberg News predicted the rate cut, while seven forecast that the bank would leave it unchanged. The shekel weakened against the dollar.
The decision to lower the rate comes amid a round of global stimulus and reduced growth predictions. The Federal Reserve last week extended its so-called Operation Twist program, designed to lower borrowing costs, as Brazil, China and Australia cut interest rates. The Fed also lowered its 2012 US growth forecast to a range of 1.9% to 2.4%, from an April projection of 2.4% to 2.9%. About 40% of Israel’s gross domestic product is from exports, with European countries and the US accounting for more than half.
“The cut came on the back of declining inflation, improving inflation expectations and easing growth momentum, but was mostly a result of global easing,” Tevfik Aksoy, chief economist for Central and Eastern Europe, the Middle East and Africa at Morgan Stanley in London, said in an email. “We do not expect another rate cut immediately, but if conditions demand so, they might ease further and they have some room to do so.”
The shekel weakened 0.2% to 3.9221 per dollar after the rate cut, poised for the lowest settlement since August 2009, at 6:46 p.m. in Tel Aviv.
The central bank on Monday cut its 2013 growth forecast to 3.4% from its March prediction of 3.5%, while leaving its forecast for this year unchanged.
The bank research department predicts the benchmark rate will stand at 2.25% in the second quarter of 2013, and a change to a rising interest-rate path will be deferred to the beginning of 2014. In its previous forecast, it had predicted a rate increase as early as the second half of 2013.
The inflation rate over the coming 12 months will be 2.4%, according to Monday’s forecast.
‘Economic risk’
The bank, in a statement explaining its rate decision, said “the level of economic risk in the world due to developments in Europe remained high and with it, the concern of negative effects on the domestic economy.”
The European economic situation is “very difficult,” Fischer said on June 14, and Israel is preparing for various scenarios regarding possible developments there.
The Bank of Israel cut the benchmark interest rate three times between September and January. It had held the rate since then, citing domestic growth and encouraging economic data in the US.
Israeli economic growth slowed to 2.9% in the first quarter, the lowest in almost three years, compared with 3.1% in the last three months of 2011, the Central Bureau of Statistics said on May 16. The Bank of Israel is forecasting that growth for the year will slow to 3.1%, from 4.8% in 2011.
Israeli inflation eased to 1.64.8 in May, its slowest pace in more than four years, as gasoline and food prices declined.
China’s central bank announced a reduction in deposit and lending rates on June 7 to prevent economic growth from falling below the government’s target of 7.5% this year. The world’s second-largest economy expanded 8.1% in the first quarter, the least in almost three years, after Europe’s debt crisis curbed demand for exports and measures to contain property prices slowed production from cement to steel.
The Reserve Bank of Australia cut interest rates for the fourth time in eight months on June 5, lowering the benchmark a quarter-point to 3.5%. Denmark’s central bank lowered its benchmark rate on May 31 by 0.15 of a percentage point to 0.45%, easing policy for a second time that month.