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Bank of Israel governor Stanley Fischer took Israel completely by surprise Tuesday night, announcing an unscheduled rate cut to the lowest level in Israeli history. With almost immediate effect - specifically, from Friday, November 14 - the central bank overnight lending rate will drop by half a percent to 3.0%, following which the retail banks are expected to lower interest on overdrafts too.

Analysts surmise that Fischer's move was spurred by the growing realization that the global economic slowdown is developing faster than had originally been predicted. "The Bank of Israel is signaling that it, the government and the Finance Ministry understand there's a need for government intervention, and we're going to see more rescue plans from the government," predicted Ori Greenfeld, macroeconomics analyst at Clal Finance, Tuesday night.

It was the second time that Fischer has leaped and lowered Israeli interest rates outside the schedule. Monetary announcements are rigidly scheduled for the last Monday of each calendar month. Yet, reacting to the situation in global capital markets and here at home, on October 7, 2008 the governor cut the rate, then again by half a percent. Then at month's end, on October 27, he shaved another quarter-percent from the rate.

Including Tuesday's move, Israeli lending rates have fallen by 1.25% inside a month. Until today, the lowest Israeli overnight rate to banks had been 3.25%, and that was in April and May of this year.

The Bank of Israel itself stated that its decision to reduce the rate again, following the previous move just two weeks ago, was based on new developments since then, including fresh assessments that the global economic slowdown will be worse than originally foreseen.

Israeli forecasters have revised their inflation predictions downward, the central bank pointed out, and the central bank itself now expects inflation to converge on the target range of 1% to 3% by the middle of next year. Until now, the expectation had been that inflation would reach the target range only by the end of 2009.

Three percent is low, but there's room for interest to fall even lower, pointed out Greenfeld Tuesday. "The Bank of Israel's interest rate decisions follow developments in world markets. If interest rates around the world continue to drop, the same will happen here." He predicts that the central bank will leave the rate at 3% until year-end, but that in 2009, the rate could drop to 2.5%.

What about the danger of inflation? That's like the snows of yesteryear, Greenfeld quipped - it's not important at this point. "At this point, what's needed are capital injections to the banks, so they'll lend money, and breathing room for corporate bonds."

Apropos of corporate bonds, the Tel-Bond 20 index of the 20 weightiest corporate bonds traded in Tel Aviv lost 1% Tuesday.

Analyst Roy Laufer of Excellence Nessuah applauded Fischer's sudden jerk. Nonetheless, the head dealer feels that it doesn't go far enough. Israel's main problem isn't in the financial sphere, it's in the broader economy, Laufer explained. "The rate cut is a good move, but it isn't the problem."

Nervous banks are charging more for loans, when they're lending at all, and the result is that companies are starved for money. And the upshot of that is that economic activity seizes up. In his view, what's needed is stimulation, mainly investment in infrastructures. "This is the time to build the train system in Tel Aviv, which we've been promised for decades, to build roads, hospitals and ports," he prescribes.