Fischer Cuts Rate Gingerly, by 0.25%

The Bank of Israel believes lower interest rates will help Israel's economy overcome the global financial crisis.

The Bank of Israel lowered its overnight lending rate for November 2008 by a quarter-percent to 3.5%, as had been widely expected. Some analysts had thought the central bank might make a more aggressive rate cut as signs of slowdown are mounting.

Yehuda Talmon, chairman of an umbrella organization for the self-employed, griped that the central bank's step was a "too-small one in the right direction." While Governor Stanley Fischer's caution could be understood, he said, the monetary system should show courage and cut interest rates more significantly.

In its announcement, the central bank noted the drop in fuel and commodity prices as the financial crisis spills over into the real economy.

The Bank of Israel management believes that lower interest rates will help Israel's economy overcome the financial tsunami sweeping through the global economy. There is no longer a question of the financial crisis turning into a real economic problem: it already has, as banks curtail lending and companies scale back investments and procurement, leading among other things to layoffs.

Interest rates on overdrafts will be dropping by 0.25% from the end of the week.

On October 7 the Bank of Israel had unexpectedly cut its rate by 0.5% to 3.75%, three weeks ahead of its next scheduled monetary meeting. At the time Fischer noted expectations that inflationary pressures would ease and cited concern about Israel's economic growth. At the same time, the central bank lowered its forecast for Israel's GDP growth for the year 2009 from 3.2% to 2.5%-2.9%.

The Bank of Israel now says that as fuel and commodity prices drop - though of course they could reverse trend and climb anew, it sees Israeli inflation converging on the target range of 1% to 3% by mid-2009. For the last 12 months inflation has run at 5.5%, well above the range of price stability.