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Investors heartened by a surprise 0.5-percent cut in the Bank of Israel interest rate sent local stocks soaring yesterday.

Bank stocks rallied due to expectations that the rate cut means corporate Israel will find it easier to return debt. And leading stocks in the real estate sector, which had been particularly hard-hit by the global financial crisis, reversed their downward trend with a rise of 20 percent.

Bank of Israel Governor Stanley Fischer stunned the Israeli financial world with the interest rate cut, which predated the next scheduled monetary meeting by three weeks. Spurred by the need to reassure unnerved investors and savers, the governor signaled that the central bank had changed its definition of the enemy, from inflation to the threat of recession.

"It's a good thing that the governor lowered the rate now, instead of waiting for month's end," said Eyal Segal, CEO of Tachlit Investment House. "It shows that the governor is active, and is responding to events in the market," he said.

Over in New York, though, the mood was much grimmer as stocks swung low, ending the session with steep losses of around 6 percent.

Financial analysts had been predicting that the Bank of Israel might lower interest rates for November. But none had expected the dramatic announcement yesterday afternoon, which lowered the central bank rate by half a percent, from 4.25 percent to 3.75 percent. The new rate will come into effect October 10.

Faced with the threat of economic slowdown and job losses, slumping government income from tax revenues, the governor made a move that does nothing to tame inflation, and everything to encourage consumption.

The five weeks during which global capital markets tottered have changed the tune at the Bank of Israel. As Iceland's leaders contemplate national bankruptcy and U.S. Federal Reserve chairman Ben Bernanke hints at more pain to come, Fischer took action.

The Bank of Israel's official job is to protect price stability, which means keeping inflation in check. Inflation has been running well over the Bank of Israel's target range - between 1 percent and 3 percent - which is set by the government. It is not officially the central bank's job to manipulate interest rates with an eye to sustaining economic growth, but that's exactly what the governor did yesterday.

Fischer had appeared troubled by the debate over whether or not Israel should institute some sort of rescue program that would stop the downward spiral of Israeli stocks. Talk of rescue programs merely fuels the panic, while Finance Ministry and Bank of Israel officials concurred that any such plan would be premature. However, Fischer seemed to think something short of an official rescue plan needed to be done.

When Yom Kippur ends Thursday night, Fischer will be flying to an International Monetary Fund conference in Washington, together with treasury chiefs and some of Israel's leading bankers. The Tel Aviv Stock Exchange will be closed until next Sunday, but his move is expected to bring some peace of mind to investors during the forced hiatus.