Behind the scenes of the surprise rate cut
The lowering of the interest rate is meant to aid in two main areas: Increasing economic growth and reducing unemployment.
What was behind the Bank of Israel's decision to lower November interest rates by 0.25% from the present 2.25% to 2%, the lowest level since January 2011? Stanley Fischer's decision, announced Monday evening, surprised many analysts.
Bank of Israel officials say Fischer often says in meetings: "We need to respond to the future and not the past." At this week's meetings of the central bank's monetary committee, Fischer repeated the phrase a number of times in an attempt to convince the five other committee members of the need to support lower interest rates. Fischer raised the question of whether it was necessary to act before the expected economic slowdown. His rationale was simple: It is easier to act when the economy is still in relatively good shape.
Even though recent economic data have been good in general, various economic bodies have been coming out with pessimistic forecasts. The predictions for the global economic situation are certainly more pessimistic: The International Monetary Fund recently lowered its growth forecast for the global economy and trade for 2013. The Bank of Israel still believes in its published forecasts for 2012 and 2013 of economic growth of 3.3% and 3% respectively, but Fischer still does not want any surprises.
Next month, the Bank of Israel will release the minutes of this week's interest rate discussions and we will be able to know how many external members of the monetary committee Fischer managed to convince to support his position. Sources say that two did not. As far as is known, there has yet to occur a situation where Fischer has had to use his double vote to break a tie in monetary committee discussions.
The Bank of Israel Law states that the central bank's primary role is to maintain price stability. Other goals are to support the government's economic policies and support the stability of the financial system.
Fischer, as opposed to his predecessor, takes supporting the government's economic policy very seriously. The lowering of the interest rate is meant to aid in two main areas: Increasing economic growth and reducing unemployment.
It seems the Bank of Israel prefered to lower rates now and not to wait for the economic data of the next few months - even not for the figures on third-quarter economic growth the Central Bureau of Statistics will publish in two weeks. The Bank of Israel's estimates are for the interest rate reduction to increase GDP by 0.1% to 0.2% - which is no small amount when total expected GDP growth for next year is only 3%.
Higher growth means lower unemployment. The Bank of Israel estimates 2013 unemployment will hit 8%, unless steps are taken to lower this figure.
In addition, another factor that Fischer took into account in pushing for lower interest rates was a similar reduction in October by a number of other countries, including Brazil and South Korea.
And of course, there are analysts who say the primary reason Fischer lowered rates is the upcoming Knesset election.
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