Market Cool on BoI Cut to Historic Low Rate of 0.5%

Citing the global and local recession, vanishing inflation, and monetary policy moves around the world, the Bank of Israel lowered its overnight rate for April to a historic low of 0.5%.

Analysts had widely expected the quarter-percent rate cut. This was the eighth consecutive time that the central bank lowered interest rates.

Uriel Lynn, president of the Israeli Chambers of Commerce, commented that the rate cut is useless. He recommended that from now on, the Bank of Israel focus on strengthening the financial system beyond the banks.

Economists at the Yashir investment firm were also unimpressed, for another reason - the rate cuts are yet to filter through to households and corporate Israel, they complained. The Bank of Israel has to back up the rate cuts with other moves, they said.

Michael Sarel, chief economist at the Harel group, noted that in a break from recent habit, Bank of Israel Governor Stanley Fischer didn't hint at future moves. But from what he did say, said Sarel, more rate cuts seem unlikely. Therefore, from this point on the Bank of Israel will pursue monetary expansion - increasing the money supply - by other means, Sarel said.

"These means could include buying assets, such as foreign currency and government bonds, which the [central] bank is already doing," he wrote in a reaction to yesterday's rate cut announcement. "But in contrast to the past, it won't be soaking up all the money it's injecting into the market through makam issues."

The Harel team predicts that the Bank of Israel will also start buying corporate bonds or other financial assets, depending on the situation in the markets and the central bank's assessment of how it can influence economic activity.

For instance, if the Bank of Israel decides that exporters are in the most urgent need of assistance, it can help them by soaking up foreign currency - which increases the amount of shekels out there, and could also weaken the shekel.