Bank of Israel May Cut Base Rate for First Time Since March

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Karnit Flug, Bank of Israel governor.Credit: Emil Salman
Moti Bassok

The Bank of Israel may move to cut its base lending rate, already at a historic low, and undertake quantitative easing measures on Monday to counter with a slowing economy and help weaken the shekel.

Not all analysts are convinced that Bank of Israel Governor Karnit Flug will act so soon. Some analysts are saying the central bank will wait to see what the U.S. Federal Reserve does next month. While the consensus had been that the Fed would raise interest rates, alleviating pressure on the Bank of Israel, in recent days speculation has grown that it will delay.

Meantime, gyrations in global stock markets in recent days and concerns about an economic slowdown in China have raised prospects that the Bank of Israel will cut its lending rate, which has been 0.1% since last March.

In an otherwise dismal day (Sunday) for the Tel Aviv Stock Exchange, prices for government bonds rose, which Rafi Gozlan, chief economist at IBI Israel Brokerage & Investments, said signaled expectations for an imminent rate hike.

“The expectations are that Israeli interest rates will go down in the near future, or in a decision [today] or in another month have buttressed demand,” said Gozlan.

Analysts said the central bank might cut the rate to zero or even into negative territory. Its quantitative easing program would probably involve a mix of buying up government bonds to increase liquidity in the economy and stepped-up dollar buying to help weaken the shekel.

As recent as June, Flug discounted either step, but last week the government reported that economic growth slowed to a very sluggish 0.3% annual rate in the second quarter on an annualized basis. It revised downward first-quarter growth to 2% from a previous 2.5%.

On Sunday,Finance Ministry chief economist Yoel Naveh said in a report that Israel’s second-quarter rate was at the bottom end of developed economies, with European Union countries averaging a 1.7% rate and the United States 2.4%.He confirmed that much of Israel’s plodding performance was due to double-digit declines in exports, most notably chemicals and pharmaceuticals.