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Bank of Israel Governor Stanley Fischer is expected to announce tomorrow that he is cutting the bank's base interest rate for March.

Central bank officials are predicting a reduction of either 0.25% or 0.50%.

The interest rate was 4.25% as recently as September, but it has been slashed six times since then - including two unscheduled cuts - and now stands at 1%, the lowest in Israeli history. Most Western countries have been slicing and dicing their interest rates in a similar manner.

With zero interest looming on the horizon, the Bank of Israel has pushed this would-be economic catalyst nearly as far as it can go, as interest rates cannot drop below 0%.

And since he also indicated that the bank is due to end - or at least cut back on - its dollar purchases, it will have to resort to new-old monetary instruments: Last week, the Bank of Israel began purchasing government bonds in the open market.

Behind the continuing interest rate cuts is the growing expectation of deflation, due to the deepening local and global economic crisis as well as the desire to close the gap between interest rates in Israel and in other Western countries.