Bank of Israel cuts interest rate to 2.5%

Although the bank left the interest rate unchanged last month, it had cut the rate twice in the second half of 2011.

bank of israel 248.88 (photo credit: Ariel Jerozolimski)
bank of israel 248.88
(photo credit: Ariel Jerozolimski)
The Bank of Israel on Monday cut the interest rate for February by 25 basis points from 2.75 percent to 2.5%. Although the bank left the interest rate unchanged last month, it had cut the rate twice in the second half of 2011, each time by 25 basis points, once at the end of November and before that at the end of September.
The cut was a minor surprise because in a Bloomberg poll over the weekend, 11 out of 19 analysts expected no cut, while eight experts predicted the 25 basis points cut.
In explaining the reasons for the cut, the Bank of Israel said, “ The decision to reduce the interest rate to 2.5% for February 2012 is consistent with the interest-rate policy that is intended to entrench the inflation rate within the price-stability target of 1-3% inflation a year over the next twelve months, and to support growth while maintaining financial stability.”
The Bank of Israel added that the main considerations in the decision were “the slowdown in growth of Israel’s economy as seen in exports and in domestic demand against the background of weakness in the global economy, and the significant uncertainty existing in the global environment, primarily around Europe. In addition, surveys of expectations – both of consumers and companies – show that the slowdown in the rate of growth is expected to continue.”
While the Bank of Israel expects inflation to remain within the government’s target range, it is concerned about developments in Europe.
“Data on economic activity in Europe are consistent with the assessments that the euro zone will slip into a recession in 2012. Figures of actual global trade show a continued volume decline in October. Forecasts for world trade growth in 2012 were revised downward. The risk of default of some European countries as reflected by the high yields on their bonds and their high CDS spreads was expressed this month in the downgrading of the sovereign credit rating of major European economies,” the bank said.
“Some optimism has been evident recently in global financial markets, primarily against the background of steps taken by the ECB, but uncertainty regarding the debt crisis remains high, which also affects the level of uncertainty about developments in the Israeli economy.”