Lapid and Fischer 370.
(photo credit: courtesy ministry of finance)
When Bank of Israel Gov. Stanley Fischer made the surprise announcement on
Monday that the bank would drop its benchmark interest rate from 1.75% to 1.5%
on Friday, he cited the strengthening shekel, lower interest rates around the
world and the new inflow of offshore natural gas to Israel.
bank also announced that it would buy up $2.1 billion in reserves through the
end of the year to counter currency fluctuations caused by the natural gas, a
policy it said it would revisit when a sovereign wealth fund comes online in
Left unmentioned, however, were the possible economic effects of
tax increases and welfare cuts in Finance Minister Yair Lapid’s 2013-14 budget
proposal, which the cabinet was set to approve on Monday night.
cause that’s missing from the Bank of Israel’s release is the updated growth
forecast in Israel in the coming years, in view of the Treasury’s tightening
fiscal policy that aims to narrow the structural deficit,” said Uri Greenfeld,
who heads the research department at Psagot Investment House Ltd. The cuts, he
said, are expected to lop a half-point of GDP growth off of 2014
Leader Capital Markets estimated the decrease in economic growth
“If the budget proposal is accepted as it,” said Eran Tazhi, a
research analyst at Infinity, it would lead to a “moderation in demand that
results from the increase in direct taxes.”
Central banks sometimes use
the interest rate to give a lagging economy a boost; lowering the cost of
borrowing money makes it cheaper for business owners or entrepreneurs to invest
in their businesses.
“Reducing the interest rate will help the business
sector in general and small businesses and the self-employed in particular, but
monetary policy is not a substitute for government policy that actively
initiates encouragement for the business sector,” said Ehud Ratzavi of Lahav, a
A spokesman for the Bank of Israel said that claims
of reduced growth are premature, noting that the details of the budget have yet
to be finalized. Even with a harsh package of welfare cuts and tax hikes, he
said, the budget is overall growing by 7% in real terms, which should have a
stimulatory effect on the economy.
“The message we sent out was very
precise about the reasons for the decision,” he said.
According to the
bank, the shekel effectively appreciated by 2.4% in the past month, and by 5.4%
in the past three months. “The shekel’s strength against the dollar and the euro
during these periods stood out markedly in comparison with other currencies’
movements vis-à-vis the dollar and euro,” the central bank
Alongside lower growth forecasts in China and Europe, the interest
rate reduction in Europe and the influx of dollars from the Tamar natural gas
field, those factors are expected to further strengthen the stubbornly strong
“Apparently the Bank of Israel wanted to achieve the effect of a
surprise in order to maximize the effect on the foreign exchange market,”
Greenfeld of the bank’s early announcement.
After sinking as low as 3.556
to the dollar last week, the shekel closed at 3.571 on Monday.