Driven by slowing domestic demand and falling inflation expectations, the Bank of Israel yesterday chose to lower its benchmark rate of interest for February by a quarter-percent, to 2.5%. Following the announcement last night, Israel's commercial banks will be lowering the interest they charge on overdrafts by 0.25% at the week's end.
The Bank of Israel is opting for inflation risk rather than demand risk, said Clal Finance macro economist Amir Kahanovich following the central bank's announcement yesterday. He projects that the central bank will again lower its rate for March, again by a quarter-percent.
Not only has domestic demand been slowing - so has economic growth. The assumption is that lowering interest rates will spur borrowing and consumption, by companies and the public. That in turn will drive economic growth.
The central bank is also worried about recession in Europe, it transpires. "The macroeconomic data on the euro zone continue to indicate the start of a recession, the most prominent being Germany's negative growth rate of 0.25 percent in the fourth quarter of 2011," the Bank of Israel wrote.
Another reason for the rate cut is that interest rates in the developed countries are very low. Moreover, the financial markets are not pricing in anticipation of rate increases this year at all. U.S. interest rates are expected to remain at rock-bottom through to the middle of 2013.
Also, housing prices in Israel seem to be declining, if not markedly so.
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