Bank of Israel expected to cut interest rates today

The move would be an apparent about-face by Fischer, who less than two weeks ago rebuffed a call for an interest rate cut.

stanley fischer 1 88 224 (photo credit: Ariel Jerozolimski)
stanley fischer 1 88 224
(photo credit: Ariel Jerozolimski)
Bank of Israel Governor Stanley Fischer is expected to lower the benchmark interest rate on Monday, in an effort to slow the appreciation of the shekel against a sinking dollar and to help exporters. A knowledgeable source told The Jerusalem Post that the rate could be cut by a quarter of a percentage point, from 4.25 percent to 4.0%. A Bank of Israel spokeswoman confirmed that a discussion had been held on the issue on Sunday, and that the central bank's official decision would be published at 6:30 p.m. on Monday. "Interest rates affect every part of economic life," said a source who preferred to remain unnamed. "And a recent report from the Bank of Israel, which listed a 0% inflation rate, may have given him [Fischer] confidence to lower the rates without fear of inflation." Still, the move would be an apparent about-face by Fischer, who less than two weeks ago rebuffed a call for an interest rate cut, telling reporters he would not lower the rate for fear of a rise in inflation. "An interest rate cut will not necessarily halt these processes and lower the shekel-dollar exchange rate," he said. In 2001, then-Bank of Israel governor David Klein lowered interest rates by 2%, which, Fischer pointed out at the press conference, led to a large increase in rates later on. "We made this mistake in 2001," Fischer said, "and interest rates were then raised by four percentage points over the next few months." The continuing appreciation of the shekel against the dollar could be behind a cut in the interest rate this week. The American currency has hit a 10-year low against the shekel. Still, a quarter of a percentage point wouldn't make much difference to average Israeli consumers, unless of course they are paying back loans or thinking about taking one out, a prominent Israeli economist said. "Let me put it very simply," Ben-Zion Vilberfarb told The Jerusalem Post. "If the Bank of Israel had reason to believe that it was out of the 1-to-3 percent target as far as inflation is concerned, they would not reduce interest rates. However, the reality is that the dollar rate has lowered inflation in Israel and given the Bank of Israel the ability to possibly lower interest rates without inflation going up." Projections are that the Consumer Price Index could drop in both February and March, after being unchanged in January. Vilberfarb dismissed the possibility that pressure from the Manufacturers Association of Israel was a factor in a possible rate reduction. The association recently put forth - but later withdrew - a proposal to change the 1954 Bank of Israel Law, which limits the central bank's mandate when making interest-rate decisions to keeping inflation under control. The concerns of Israel's exporters may be weighing on Fischer, given that they are most affected by the dollar's decline, sources said. "The weak dollar has definitely had an effect on prices in Israel, because so many prices are tied to the dollar," said Vilberfarb. "What's going on with exporters is of prime concern to the Bank of Israel, because Israel is a predominantly export-based economy."