Tags: interest | rate | bank | shekel

Bank of Israel Unexpectedly Cuts Rate

Monday, 13 May 2013 11:39 AM

Israel’s central bank unexpectedly cut its benchmark interest rate to a three-year low and announced a program to purchase foreign currency to limit gains in the shekel. Israeli stocks and bonds gained.

The Bank of Israel, led by Governor Stanley Fischer, lowered the lending rate by a quarter percentage point to 1.5 percent, sending the shekel down the most since January. The bank said the steps were “in light of the continued appreciation of the shekel, taking into account the start of natural gas production from the Tamar gas field, interest rate reductions by many central banks, notably the European Central Bank, the quantitative easing in major economies worldwide and the downward revision in global growth forecasts.”

Central banks overseeing about a quarter of the world’s gross domestic product have cut interest rates this month, spanning the globe from the euro area and Australia to Kenya and Sri Lanka. Exports make up about 40 percent of Israel’s economy and are hurt by a stronger shekel, which has surged 8.9 percent in the past six months, making it the second-best performer after the Mexican peso among 31 major currencies tracked by Bloomberg.

“We were expecting a rate cut at the next scheduled decision because of low inflation, the rate cuts being made abroad and the capital inflows due to the rate differential,” said Ayelet Nir, chief economist and strategist at Psagot Investment House Ltd. “Doing it as a surprise move gives it more impact, while the downside is it gives the appearance of acting under pressure.”

Natural Gas Sales

The bank said it will purchase about $2.1 billion by the end of the year, to help offset the effects of natural gas sales. It will revisit the plan when a natural gas “wealth fund” begins operation, which is expected during 2018.

“Natural gas production in Israel is causing an improvement in the current account, which is leading to appreciation pressures on the shekel,” the bank said in a statement. “This phenomenon, often referred to as ‘Dutch disease’ is liable to negatively impact Israel’s economy.”

The shekel weakened the most since January after the decision, falling 1.1 percent to 3.6097 per dollar at 3:32 p.m. in Tel Aviv. The benchmark TA-25 stock index jumped as much as 1.3 percent, its biggest intraday advance since March 18. The yield on the 4.25 percent government bonds due March 2023 fell three basis points to 3.51 percent at 3:45 p.m.

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Israel's central bank unexpectedly cut its benchmark interest rate to a three-year low and announced a program to purchase foreign currency to limit gains in the shekel.
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2013-39-13
Monday, 13 May 2013 11:39 AM
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