The Bottom Line / Free Credit on the Horizon, but the Recession Is Already Here

Victims of the economic crisis in 2009 will be foreign trade, and Israel will be hard hit by the fall of international commerce.

Central bank governor Stanley Fischer's decision to slash the interest rate significantly by 0.75%, to reach 1%, is the sixth consecutive time that rates have been lowered in the past five months.

Since September, interest rates have been lowered by an unprecedented 3.25%, from 4.25% in November (twice), December, January and February. Bank of Israel Governor Stanley Fischer is doing everything in his power to stabilize the economy in the raging global storm.

Lowering of the interest rate to 1%, close to free financing, means that the governor is nearing the moment when the power of the principal instrument at his disposal, the interest rate, will have been fully exploited.

The U.S. Federal Reserve will convene for its monthly meeting tomorrow. Since the Fed's basic interest rate is already close to zero - 0.0%-0.25% - no change of interest rate is expected.

Most analysts had forecasted that the governor would lower interest rates by 0.50%. Not for the first time, he decided to take a more radical path, cutting rates more deeply than expected. The main reason for the move was updated estimates that global economic growth in 2009 would suffer far worse than originally thought.

One of the main victims of the economic crisis in 2009 will be foreign trade, and Israel, with nearly half of its products designated for export, will be hard hit by the fall of international commerce. The global pessimism, which prompted Bank of Israel early this week to adjust its 2009 economic growth forecast to a negative 0.2%, also prompted the central bank's decision yesterday to lower interest rates sharply.

The Bank of Israel has become far more pessimistic recently. In its announcement on the interest rate yesterday, the central bank stated that "the expected time of recovery is receding." Moreover, after a relative calm on markets in December, in January "recovery of the global financial system seems further away. The large injection of capital by governments into the banking systems in the U.S., the U.K. and other countries has not yet stabilized the financial system, nor has it yet led to a significant renewal of credit activity or stimulation of economic activity.

The earlier assessment that the emerging market countries would make up for the slowdown in the advanced economies is not being realized, as the forecasts regarding their economies are also becoming much more pessimistic."

The Bank of Israel notes that other countries are not standing by passively: "To deal with the recession, governments worldwide are undertaking fiscal expansion, with significant increases in their deficits."

It's a shame that the efforts being made by the central bank governor, government and treasury, which have become something of a lame duck, are not being met with any backup from in the economic arena.