The United States Federal Reserve Bank cut its prime rate to a record low of near zero Tuesday afternoon, catapulting the shekel and stocks in Tel Aviv and elsewhere in the world.
The slash, much deeper than expected, means the Fed cannot set rates any lower as it tries to prevent a recession from becoming long and deep. The near-zero rate makes the dollar cheaper because it discourages anyone from saving dollars for a measly rate of return.
The Fed's cut makes the shekel, where investors can earn nearly two percent, much more attractive, and the shekel-dollar rate had plummeted the past week from NIS 4.00 to the dollar down to NIS 3.88 in expectation of the cut. However, the dramatic reduction brought the rate down to NIS 3.74 (26.7 cents to a shekel) Wednesday morning.
The shekel has been through a dizzying up-and-down ride the past year, strengthening to nearly 30 cents to the dollar, which was worth NIS 3.22, due to the seeming ever-expanding Israeli economy and low inflation rate.
Soaring crude oil and commodity prices, coupled with over-extended financial firms in the United States, turned financial markets on their heads and sent people scurrying to the dollar as a safe haven. The shekel was caught in the whirlwind and lost 25 percent of its value in several weeks before the Fed cut.
The slash in interest rates had a two-fold positive effect on stock markets. A lower rate encourages people to spend their money and will help the economy grow. It also makes companies that pay out dividends more attractive to investors.
The Tel Aviv Stock Exchange (TASE) indices, which have dropped more than 50 percent this year, rose by more than four percent Tuesday and Wednesday morning before backing off slightly.
Bank of Israel Governor Prof. Stanley Fischer is expected to cut the prime rate to Israeli banks again, but it is not clear by how much.
Israel, like the rest of the world, is facing a recession, and layoffs have hit virtually every industry.
Haifa Chemicals, which manufactures fertilizers, food additives and chemicals, will close its two plants in Haifa and near Arad next month. One employee told Israel National News that the company is paying for half of the time off and that workers will have to bear the other half.
He explained that demand has sunk because farmers and factories had bought products in anticipation of a constant surge in prices. Once the commodities bubble burst, they were caught with large inventories and stopped buying while prices dropped. At the same time, worldwide demand has dropped in the weaker of the credit crises, resulting in a similar drop in demand for chemicals and fertilizers.