Fire Sale on Cash

Bank of Israel Governor Prof. Stanley Fischer announced Monday night that the prime interest rate for banks will be at an all-time low of one percent as he tries to free the country from the economic strangulation of a recession.

The cut had little effect on the shekel-dollar rate because foreign currency traders already had taken the new interest rate into account, driving the dollar up to nearly four shekels early Monday before it fell back to the current 3.98 level.

Fischer's interest rate slash followed that of most Western countries in recent months as economic growth continues to dive beneath the most pessimistic predictions. He lowered his growth forecast several times last year, and dryly noted Monday night that there has been "a marked decline in demand and economic activity."

The latest revision of growth concedes that instead of previously estimated 1.5 percent growth this year, Israel will join the growing ranks of nations in a recession and will see a minus growth of 0.2 percent.

The good news is that everything is relative. Despite the bad situation, it is worse in Western countries where the banking system is more unstable and the recession is worse.

The good news is that everything is relative. Despite the bad situation, it is worse in Western countries.

Exactly a year ago, economists, including the Bank of Israel, were confident that Israel's robust economic growth of more than five percent coupled with near zero inflation would provide armor against the fallout of the financial credit tsunami that began in the United States and affected the entire world.

"The effects of the global crisis on real economic activity in Israel are evident, with data indicating a marked decline in demand and economic activity," the Bank of Israel stated while explaining the extraordinary cut in the interest rate.

Inflation, which soared out of control the first half of last year due to skyrocketing fuel and food prices, has tumbled as the commodity price bubble burst. The price of crude oil, which was nearly $150 a barrel last July, was quoted at $46.50 Monday afternoon in New York.

The cut in interest rate is aimed at halting the domino effect caused by the credit crisis and falling prices that were accompanied by massive layoffs, resulting in less consumer demand that in turn causes further layoffs.

The government may be the worst hit by the economic chaos. Falling income and dropping prices mean less revenue in taxes at the same time that the government needs to increase spending to help failing sectors in the economy.

The result is a soaring deficit coinciding with the election and expected coalition bargaining that will cost even more money.