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In September 2008, the Bank of Israel's overnight rate to banks was 4.25%. Yesterday the central bank lowered the rate for April 2009 to 0.5%, the lowest in Israeli history. Inside seven months, therefore, interest rates dropped by 3.75%.

It is still theoretically possible for Governor Stanley Fischer to lower the rate some more, to 0.25%. But generally the feeling is that no more can be achieved through rate cuts. The next time the Bank of Israel changes interest rates, it will have to be upward.

The central bank also admits that economically speaking, there's no difference between a rate of 0.75% and 0.5% or even 0.25%.

For years, interest rates had been the Bank of Israel's main weapon. Now its ammo is gone and the central bank has to resort to other means of implementing monetary policy.

In 2008, the Bank of Israel went back in time, resorting to a practice long since abandoned: intervention in the foreign currency market. It began buying dollars, which it hadn't done for ten years. Fischer officially stated that the central bank was buying dollars to increase Israel's foreign currency reserves, but the real reason was, it seems, to give exporters a helping hand. Buying dollars weakened the shekel. The exporters would get more shekels for their dollars or other foreign currencies.

Thing is, the Bank of Israel said it would increase Israel's foreign currency reserves to $44 billion. Next month it hits that target. Then what?

So the central bank is looking for other tools. On February 16, it said that the next day it would start buying government bonds on the open market. The stated purpose was to depress long-term interest rates. Since then, the Bank of Israel has been doing exactly that - buying Israeli government bonds on the open market. Its first report on its activity will be on Thursday. Keep an eye open for it: Then we'll know how much strength this new monetary weapon has.

The Bank of Israel is also thinking of buying corporate bonds, but corporate bonds are a highly problematic instrument. For the time being the governor seems to be placing new decisions on a back burner. For one thing, the situation may be dire but there's no emergency. But mainly, there's a new government forming, with a new finance minister.