Central Bank Makes First Rate Cut in Five Months

In a statement the central bank said its main goal in lowering rates was 'to keep the inflation rate within the price stability target.'

The Bank of Israel lowered its benchmark short-term interest rate for July by 0.25% to 2.25%, as most analysts expected. The central bank's monetary committee made the announcement Monday evening.

In a statement the central bank said its main goal in lowering rates was "to keep the inflation rate within the price stability target of 1% to 3% a year over the next 12 months, and to support growth while maintaining financial stability."

The last time the governor of the Bank of Israel, Stanley Fischer, lowered interest rates was for February, and the central bank has left rates unchanged since then.

The commercial banks will lower the interest they charge most customers on their overdrafts by the same amount on July 1.

As to future interest rate decisions, "the path of the interest rate in the future depends on developments in the inflation environment, growth in Israel, the global economy, monetary policies of major central banks, and developments in the exchange rate of the shekel. The interest rate reduction will contribute to strengthening the Israeli economy's ability to deal with the impact of potential negative consequences from the global economy," wrote the Bank of Israel.

Lowering interest rates by a quarter of a percentage point will save the average mortgage taker about NIS 100 a month, said Amit Kaminsky, CEO of AMG Mortgages.

Low inflation in Israel and abroad forced Fischer to lower the rates, because of the problem of corporate debt repayment, said Golan Sapir, deputy CEO of Sigma Investment House. Israeli concerns will have to pay back more than NIS 20 billion over the next year and urgently need relief from cheap loans, he added.

The Manufacturers Association of Israel praised Fischer's move. "Lowering interest rates now is in keeping with the central goal of the Bank of Israel, price stability, as well as with the changing goals of supporting [economic] growth and employment," said Avraham Novogrodsky, chairman of the association's economic committee.

The central bank listed four main reasons as to why Fischer decided to lower rates: low inflation, moderate economic growth in Israel, a slowdown in global economic growth and global interest rates that continue to be very low.

Most indicators of real economic activity in Israel point to continued moderate growth at an annual rate of 3%, a rate similar to that of the first quarter, said the Bank of Israel.

After the reduction in the interest rate for July, the central bank's forecast for GDP growth in 2012 remains 3.1% and the forecast for 2013 has been revised to 3.4%. But "macroeconomic data around the world indicate a further slowdown in growth, and projections of international organizations were revised downward. The level of economic risk in the world due to developments in Europe remained high, and with it the concern of negative effects on the domestic economy," wrote the central bank.

The Bank of Israel said it "will continue to monitor developments in the Israeli and global economies and in financial markets, particularly in light of the increasing uncertainty in the global economy ... and will use the tools available to it to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, and in this regard will keep a close watch on developments in the asset markets."

The minutes of the monetary committee's discussions on the July interest rate decision will be published in two weeks.