BoI suddenly slashes interest rate as recession looms large
The Bank of Israel yesterday utterly shocked the markets with a half-percent interest rate cut, 20 days ahead of the scheduled monthly monetary announcement. Impelled to swift action by the escalating global panic, which has affected the relatively resilient Israeli marketplace too, Governor Stanley Fischer cut lending rates by 0.5% to 3.75%, effective October 12. The surprise move spurred a rally on the Tel Aviv Stock Exchange, where the Real Estate-15 index soared by nearly 20%. (See Page 11.)
A central bank spokesman said that the move was designed to address the spiraling uncertainty in global financial markets. Analysts had been wondering whether the central bank would lower lending rates for November: Inflation remains high, they pointed out. The Bank of Israel's sole mandate is to keep prices steady. But under the circumstances, say bank sources, supporting growth and stability have become a primary concern, more important even than price stability.
The Bank of Israel emphasizes its aim of supporting economic growth and stability, as long as inflation is expected to converge to the price stability range. The Tel Aviv-based brokerage IBI predicts that inflation will begin to abate as soon as commodity prices recede, but that it will only converge on that range - 1% to 3% - toward the end of next year.
Meanwhile, however, the Bank of Israel predicts that Israel's economy has become more likely to slow down as the global financial crisis hits close to home.
The interest rate cut will bolster the economy's ability to meet the challenges it faces, the central bank explains.
Shlomo Maoz, chief economist at the investment firm Analyst, applauded the move yesterday. He for one hopes that the rate will drop to around 2% by January. "The shekel has become stronger than the yen, the only currency that strengthened against the dollar, and until the announcement, the shekel was the only currency that was strengthening anywhere in the world. The bank's announcement is positive and timely," Maoz said.
The global credit crunch has made it harder for Israeli businesses to borrow, to the extent that bonds issued by formerly blue-chip companies are trading at junk-yield levels. The rate cut means that they can borrow at less onerous rates.
Indeed, manufacturers responded to the news with joy. "We applaud the initiative," stated Shraga Brosh, president of the Manufacturers Association. Yehuda Talmon, president of the Lahav Israel Association of the Self-Employed, called the move a "courageous" one, which proved that Fischer was attentive to the difficulties that the business scene faces.
Another thing that motivated Fischer's move is the assessment that inflationary pressures in Israel will ease as commodity prices continue to fall and growth slows. Slower growth means that domestic consumption will drop, which will depress inflation.
The Bank of Israel promised to continue to closely monitor Israeli and worldwide economic developments, and to take whatever steps necessary to achieve price stability. That, the bank reiterates, is essential for sustainable growth, and to support the stability of the financial system.
Subject to this, the Bank of Israel will continue to support the attainment of a range of macroeconomic objectives, in particular employment and growth, it said.
Meanwhile, by the way, Finance Minister Roni Bar-On met yesterday with Ofer Eini, chairman of the Histadrut labor federation, to discuss the latest economic developments. It was their first meeting since the crisis really started to develop steam in recent weels.
Bar-On also met with the manufacturers' lobbyist Shraga Brosh, and with Avishay Braverman, chairman of the Knesset Finance Committee. After the holidays, Bar-On intends to convene Israel's economic leaders to discuss the ramifications of global developments for Israel, and discuss steps Israel should take.
Previous attempts to schedule a broad conference failed because some of these leaders said they were going on holiday.