Stanley Fischer
Stanley FischerIDC Herzliya

After five months of holding the rate steady, the Bank of Israel on Monday lowered interest rates. The prime rate was cut by a quarter of a percent, from 2.5% to 2.25%. As a result, the shekel immediately began to fall, after reaching a three year high of NIS 3.91/dollar on Monday afternoon.

In a statement, the Bank said that it was lowering rates because of an expected fall in inflation in the coming months. That, together with the economic uncertainty in world markets today, merited the stimulus a lower interest rate would bring to the economy. Despite forecasts of rising prices, food costs have actually gone down in recent months, with an 0.4% drop in food prices recorded last month.

In addition to low inflation rates, Israel's GDP was rising at a satisfactory rate. However, to ensure continued growth, officials felt it necessary to take some pre-emptive action, and lowering interest rates by a quarter of a percent should, the statement said, enable the economy to keep growing, even taking into account the turmoil in the rest of the world, especially Europe. The inflation “window” that the Bank is comfortable with is between 1% and 3%, and currently annual inflation is running at 1.6%.

The statement added that real estate prices in Israel were recovering, and that home prices had risen 0.3% last month. The lower interest rates, combined with the rising real estate prices, would likely further push demand, meaning that homeowners were likely to profit from the situation if they decide to sell their homes in the coming months, analysts said.