UPDATE 2-Israel unexpectedly cuts interest rates to bolster growth

Mon Feb 24, 2014 12:51pm EST

Related Topics

* Cuts main rate by 25 bps to 0.75 pct

* First rate cut since September

* Cites weak consumer confidence, labour mkt (Adds shekel reaction, analysts' comments)

By Steven Scheer

JERUSALEM, Feb 24 (Reuters) - The Bank of Israel unexpectedly cut its benchmark interest rate on Monday for the first time since September, citing concerns over slowing economic growth, although analysts do not expect any more easing.

A drop in inflation to 1.4 percent last month and a relatively stable shekel enabled the bank to resume an easing cycle that had been on hold for four months.

It cut its benchmark rate by 25 basis points to 0.75 percent, the lowest level since November 2009.

"Various indicators of activity in January pointed to some recovery, but consumer confidence indices continued to signal pessimism, and data continued to indicate a lack of growth in employment and wages in the business sector," the Bank of Israel said in a statement accompanying the rate cut.

A relatively strong economy has helped Israel weather the recent turmoil in emerging markets reasonably well. Growth is projected at 3.3 percent in 2014 for a second straight year.

Still, data this month showed the economy grew by an annualised 2.3 percent in the fourth-quarter, well below expectations. The central bank noted on Monday that excluding the public sector, economic growth was just 1.6 percent in the last three months of 2013.

"This decision (to cut rates) will lead to a weaker shekel, which will help local industry improve its competitiveness and deal more successfully in international markets," said Zvi Oren, president of the Manufacturers' Association, who had lobbied the central bank hard to take action against the currency, which had appreciated by 12 percent since July 2012.

The shekel weakened to 3.5170 per dollar on Monday after the rate cut, from around 3.5060 just before the decision.

The central bank said that even in the fourth quarter, a positive turnaround in exports was based mainly on pharmaceuticals exports which are generally volatile, while exports by labour-intensive industries were still virtually stagnant.

It continued to express concern about house prices though, noting they had risen by 8.1 percent in the past year while the number of transactions continued to rise and the volume of mortgages being granted remained high.

All 11 economists polled by Reuters had predicted no change in rates on Monday, citing the hot property market as a factor. Most believed the easing cycle that began in September 2011, when the key rate was 3.25 percent, was over barring a sharp downturn in growth.

SHEKEL EASES

The central bank - which rarely keeps rates steady for more than four months - said in its statement that inflation expectations for the next year were well below 2 percent and global growth was weak.

"After two quarters of rapid growth, recent U.S. economic data were disappointing, though it is too early to determine if it is a temporary slowdown or a turning point downward. In Europe, slow growth continues, and there are growing concerns of deflation," it said.

At its last policy meeting a month ago, the monetary policy committee (MPC) voted 5-0 to leave the bank's key rate at 1.0 percent, citing a strong shekel as a key factor.

Since then the shekel has been relatively stable with the central bank saying the currency depreciated by 1 percent in terms of the nominal effective rate.

Ofer Klein, head of economics and research at Harel Insurance and Finance, said the central bank's arguments for cutting rates appeared similar to those it had used in recent months in choosing to leave rates unchanged.

"We believe the factors that tipped the balance towards lowering interest rates were weak data recently published in the United States and the possibility that the European Central Bank will also act to counter a continuing decline in inflation in the bloc," he said.

Even if the shekel - which is still near a 2-1/2 year high versus the dollar after a 9 percent gain in 2013 - appreciates further, the Bank of Israel will use foreign exchange market intervention over more rate cuts, he said.

In December and January, the central bank bought more than $2.3 billion of foreign currency to prevent a rapid shekel appreciation.

The MPC will revert to its normal six members starting next month following the cabinet's approval on Sunday of Nadine Baudot-Trajtenberg as deputy to Bank of Israel Governor Karnit Flug. She will start her new post on March 2. (Additional reporting by Tova Cohen; Editing by Susan Fenton)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.