Despite the expectations of many that the rate will remain unchanged, the Bank of Israel reported today it will cut the Israeli basic interest rate by 0.25 percent points so that the October interest rate will by 3%, compared to 3.25% in September 2011. The last time Bank of Israel changed its basic interest rate was back in June 2011 when it raised the rate by 0.25 percent points. During 2011, Bank of Israel raised the Israeli interest rate four times. This rate cut was the first one since April 2009.
This change in direction shows that the Bank of Israel is more concern of the Israeli economy pulling into a recession that reaching the actual inflation target of Bank of Israel (3%).
As of August 2011, during the last 12 months the Israeli inflation inclined by 3.4%, which is still slightly above the Bank’s annual inflation target rate of 3%. There are expectations that the CPI will continue to fall in the next twelve months to 2.3%.
There are also concerns that Israeli economy is slowing down because the Bank reported of slower growth rate in 2011 than in 2010. The Bank also reported a drop in local government income, adjusted for seasonality by 9% due to an ongoing drop in the indirect tax income; the government deficit will be below the deficit ceiling set by law as percent of the Israeli GDP in 2011 (the limit by law is 3%).
During September the US dollar sharply appreciated against the NIS as it did during August as well. In September the US dollar inclined by 3.67% against the NIS. The recent drop in the interest rate is likely to further push up the US dollar against the NIS in the weeks to come..
Lior Cohen, M.A. economist and blogger at IBR and Trading NRG.
For further reading: