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The Bank of Israel lowered central bank interest rates for March by 0.5%; the prevailing expectation in the marketplace had been that Governor Stanley Fischer would leave the central bank rate unchanged or reduce it by 0.25%.

The rate cut lowers the Bank of Israel rate to 3.75%. All the commercial banks will follow suit and lower the interest they charge on credit from Thursday. Bank Hapoalim yesterday announced that from Thursday, the new prime rate will be 5.25%, interest on approved credit will be 8.75% and interest rates on overdrafts above the ceiling will run at 12.25%.

The Bank of Israel stated that the sharp cut should support economic growth without impairing its own efforts to push inflation back to the target range of price stability, which is 1% to 3% a year. Right now inflation is running above the upper boundary.

Analysts had not expected a half-percent cut. "The Bank of Israel is continuing to chase the dollar," said Vered Dar, chief economist at the brokerage Psagot, last night.

"But when the dollar's trend turns, which will happen at some stage, the governor will have to U-turn and raise the rates again. That may happen at a bad time, when the economy is already showing signs of slowing."

Dar added that the market had expected gradual rate cuts and now Fischer, with his one sharp slash, has taken that hope away. "Markets don't like surprises," she said. "Tomorrow the bond and stock markets are likely to soar at the opening - but the gains will abate by afternoon because of the 'you ruined our expectation' element."

Among its reasons, the central bank noted the expected slowdown in the global economy, which should depress price hikes, and also pointed to anticipation of negative CPI figures for February and March.