Interest rates will go down by a quarter point on Friday, an unusual mid-month move by outgoing Bank of Israel Chairman Stanley Fischer. Generally, such changes are made at the end of a calendar month, but it appeared that he was responding to pressure from exporters who claim they are suffering from the high value of the shekel. The new prime interest rate will be 1.5%.
In addition to the interest rate reduction, the BOI announced that it would step up purchases of foreign currency. Both moves are expected to reduce demand for shekels, letting the Israeli currency “breathe” and devalue somewhat against the dollar, against which it has been very strong of late. By the end of the year, the BOI intends to sop up some $2 billion.
In a statement, the Bank said that much of the appreciation of the shekel in recent months – an average of some 3% per month over the past three months – was due to the expected flood of foreign currency in the wake of sales of gas from the Tamar field. In addition, central banks around the world have been cutting interest rates, leaving Israel with a relatively high rate, which was attracting foreign currency traders seeking to make more money in shekel investments. The purchase of the dollars at a hopefully lower dollar (and higher shekel) value, along with the likelihood that fewer foreign investors will put their money in Israeli banks, will stem the rise of the shekel and even reverse it, the Bank hopes.
On Monday, the shekel closed 0.36% higher, at NIS 3.57, after jumping as much as 1.6% during the day to NIS 3.6, indicating that the BOI moves were already having the desired effect, economists said.
But solving one problem could cause another. With a lower interest rate, loans – especially mortgages – become more popular. Higher inflation for goods and services is also a possibility as fewer people save money because they are earning less on their savings, but the major worry for the Bank is a possible rise in the cost of homes, a major problem for many young couples who, as it is, cannot afford to buy homes. In its statement, the Bank said that inflation in general has been below the targets set at the beginning of the year, and that it had increased it supervision of banks to ensure that all the mortgages granted were in line with the rules, which prevent people who already own homes from getting preferred interest rates.