Bank of Israel Steps In, Lowers Interest

Bank of Israel Gov. Fischer surprised the markets with an unexpected lowering of the interest rate, from 4.25% to 3.75%. The move was praised.

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Hillel Fendel,

Bank of Israel Governor Stanley Fischer surprised the markets late Tuesday afternoon with an unexpected lowering of the interest rate, from 4.25% to 3.75%. Economic experts praised the move.

The next interest change had not been expected until Oct. 27, or almost three weeks away. The change which will take effect on Sunday, Oct. 12, after the Yom Kippur break.

The Bank of Israel provided three reasons for the decision: The expected drop in inflation, the continued drop in the price of goods around the world, and the forecasted slowdown in domestic economic growth.  

More specifically, Globes reports that the decision to lower the interest was made in light of the sharply rising uncertainty in the world financial markets and the ramifications upon Israel's markets.  The lowered interest will enable the market to better deal with the challenges now facing it, Bank of Israel officials explain, as it increases liquidity and supports market stability and growth.

The Tel Aviv Stock Exchange (TASE) and other economic indicators responded positively. Shortly after the announcement, the TASE was up some 3.6% and the Tel-Tech 15 was rising by over 4.8%.  The dollar continues its climb and is now at 3.5225 shekels, 2 agorot more than the exchange rate set less than an hour earlier, and the euro is 4.824, 5 agorot higher than the official exchange rate.

Yossi Frank, Chairman of Energy Finances in Israel, predicted this morning that the Bank of Israel would lower the interest rate in a column he wrote for Globes.  Afterwards, he said, "Lowering the interest provides direction, and shows that Israel's central bank is ready to fight in the foreign currency market and also vis-a-vis the financial crisis.  Until now, Israel's top financial echelon settled for declarations that all is OK and stable - but action was needed."

Dollar Purchases
The Bank of Israel also announced this morning (Tuesday) that it may continue its dollar purchasing program even after Israel's foreign currency reserves reach the original target level, if circumstances warrant.

A decision by Fischer several months ago to purchase first $25 million a day, then $100 million a day, has been credited with stopping the dollar's downward climb compared with the Israeli shekel.  Just last week, he said he has no intention of continuing this policy after Israel's dollar reserves hit $40 billion - but added, "A Central Bank never says never, however."