BoI reduces interest rate to 1 percent

Seasonal unemployment down to 6.3%; shekel has hit its strongest levels in two years.

Bank of Israel 370 (photo credit: Wikimedia Commons)
Bank of Israel 370
(photo credit: Wikimedia Commons)
The Bank of Israel reduced the interest rate for the first time in four months on Monday, lowering it a quarter of a percentage point to 1 percent just a day after the shekel hit its strongest levels in two years.
The Bank downgraded the annual growth forecast for 2013 down 0.2% to 3.6%, though it upgraded the 2014 growth forecast by the same amount, to 3.4%.
In good news for Finance Minister Yair Lapid, the bank estimated that the annual deficit would come out at 4%, well under the 4.65%, and hit the 3% target in 2014.
Analysts had expected an eventual drop in the rate, given modest inflation forecasts, moderate economic growth and the strength of the shekel.
After spiking to NIS 3.65 to the dollar amid expectations of a US strike on Syria in August, the shekel fell to NIS 3.50 this week for the first time, prompting admonitions from Israel Manufacturers Association president Tzvika Oren.
“The ongoing crisis in the exchange rate greatly affects manufacturers and exporters’ competitiveness in global markets, and you don’t have to be a great economist to understand this,” he said before the interest rate decision, according to Globes. “At the current shekeldollar exchange rate, many companies are swinging from profit to loss, manufacturers and exporters will find it difficult to get orders, and people are already receiving layoff notices.”
BoI said that, “exports continued to decline, against the background of the virtual standstill in world trade, with pharmaceuticals exports notable for their stabilization at a low level,” though seasonal unemployment actually dropped from 6.7% to 6.3%.
Ehud Ratzabi, president of the small and medium businesses association Lahav, chided Lapid and Prime Minister Binyamin Netanyahu for not yet selecting a BoI governor.
“At the Bank of Israel, they’re not waiting for the next governor, and are working already to encourage economic growth,” he said.
Lapid and Netanyahu have failed to install a successor for Stanley Fischer, who stepped down in June, after their first two choices withdrew their nominations.
Fischer’s deputy Karnit Flug, who was passed over for the position, has since served as Acting Governor, and continues to guide and vote with the monetary committee that makes interest-rate decisions.
Some analysts expected the bank to wait for a new governor before making a decision, though the extended period of time it took to install one may have tried the committee’s patience.
“The lowering of the interest rate by Karnit Flug in the absence of a Bank of Israel governor is surprising, and leaves the governor who will come in with almost no ammunition,” said Pioneer Financial Planning’s Shmuel Ben-Arieh.