Jerusalem – Israel unexpectedly cut interest rates on Monday for the first time in five months, taking advantage of low inflation to contain economic damage from the conflict in Gaza and a strong shekel currency.
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The central bank cut its main lending rate by a quarter point to 0.5 percent, matching its all-time low set at the height of the global financial crisis in 2009.
A Reuters poll of 10 economists had unanimously forecast no change in the benchmark rate, which has been on hold since the bank announced a cut at its February meeting.
The central bank, in a statement, said that although economic data indicated continued moderate growth, thanks to services exports, the war against Hamas and other Islamist militants would harm growth to some extent. Goods exports and private spending were weak, meanwhile, and growth in employment had stalled.
Israel launched an offensive in Hamas-controlled Gaza to stop rocket fire three weeks ago and a fragile temporary truce was fraying on Monday. In Israel, security fears due to rocket attacks and frequent air raid sirens have disrupted business activity and caused a drop in industrial output.
“Its moderating effect (on the economy) cannot yet be estimated,” the Bank of Israel said of the three-week conflict, in which consumers have curtailed shopping.
Last week, Bank of Israel Deputy Governor Nadine Baudot-Trajtenberg told Canada’s Globe and Mail newspaper that Israel’s economy was weathering the escalating conflict as if it were a “bad winter storm”.
Exporters have also been hurt by a strong shekel, which reached a three-year high against the dollar this month. The Bank of Israel cited the strong currency as a reason for the rate cut, saying it was at a level that harmed foreign trade.
The shekel eased to a three-week low after the rate announcement, to 3.43 to the dollar but has still gained 10 percent since the start of 2013.
“The interest rate reduction is a necessary step to restore the economy to export-led growth,” said Ramzi Gabay, chairman of the Israel Export & International Cooperation Institute. “Only recovery and an increase in exports will enable sustainable growth in the economy.”
Prior to the start of fighting in Gaza, the central bank had forecast 2.9 percent economic growth in 2014, after a 3.3 percent expansion in 2013.
“Looking at the third quarter the Bank of Israel sees a further worsening of the slowdown partly due to the continuing operation in Gaza, so it decided to bring forward an interest rate cut that apparently would take place later this year,” said Yaniv Aharon, deputy head of investment at the Tamir Fishman brokerage.
Some economists, though, downplayed the impact from the Gaza conflict and attributed the rate cut to easing inflation and the strong shekel.
The annual inflation rate dropped to a seven-year low of 0.5 percent in June, below the government’s target of 1-3 percent. Excluding housing, the rate was just 0.2 percent last month.
“In light of recent economic data, the decision was justified and will help the economy deal with the slowdown through lower borrowing costs and a weaker shekel,” Aharon said.
The central bank also narrowed the interest rate corridor in the credit window and the commercial bank deposit window to +/- 0.25 percent from +/-0.5 percent.