(Adds details, central bank comments)
By Steven Scheer
JERUSALEM Aug 11 Slowing economic growth, very
low inflation, a shekel that may have over-appreciated
and the Gaza conflict led the Bank of Israel to lower short-term
interest rates last month, minutes of the discussions showed on
The central bank unexpectedly cut its benchmark interest
rate to 0.5 percent from 0.75 percent on July 28,
matching the all-time low reached at the height of the global
financial crisis in 2009. All six monetary policy committee
members voted for the rate cut.
"All the committee members agreed that reducing the interest
rate ... is a necessary step in light of the decline in the
inflation environment, the slowdown in GDP growth, and with it
the uncertainty regarding the moderating effect of Operation
Protective Edge (in Gaza) on growth, the cumulative appreciation
of the shekel, and the concern over continued slowdown in the
global economy," the central bank said.
After the cut, Bank of Israel Deputy Governor Nadine
Baudot-Trajtenberg told Reuters there was no need for further
Israel's economy is forecast to grow 2.9 percent in 2014
after a 3.3 percent spurt last year, although the central bank
believes the Gaza conflict could shave off as much as a
half-point from growth. The impact from lost tourism could be
seen for several quarters, while the effect on trade and
services will likely be short-term, it said.
"As can be learned from similar events in the past, the
effect on the economy's rate of growth will apparently be
moderate," the central bank said.
The strong shekel was another key reason for the rate cut,
which came in contrast to the predictions of all 10 economists
polled by Reuters. Since the reduction and following market
intervention, the shekel - which had hit a 3-year high versus
the dollar last month - has weakened 2 percent to a rate of
3.47. It had risen some 10 percent since early 2013.
"Committee members referred to the shekel's prolonged
appreciation, and they assessed that the level of the exchange
rate reflects some over-appreciation," the minutes said. They
"expressed concern over further appreciation, especially in
light of the slow growth in world trade volumes."
Forces strengthening the shekel include a current account
surplus, large volume of direct investment in the economy, and
institutional investors' hedging of investments abroad.
Low inflation, in which the annual rate fell to a seven-year
low of 0.5 percent in June, enabled the central bank to cut
rates. Policymakers expect inflation to remain below a target
range of 1-3 percent for months ahead and agreed that the
decline has stemmed from lower food and energy prices.
But the MPC was split as to the reason, with some believing
the moderation was due to weakness in domestic demand, while
others said low inflation was temporary and is not expected to
have an impact on activity.
"Committee members agreed that action should be taken in
order to return the inflation rate to within the price stability
range within the coming 12 months," the minutes said.
The MPC also noted that the decline in corporate bond
spreads stopped after a moderation in the amount of new
investment in corporate bond mutual funds and for the first time
in two years there were net withdrawals.
"Spreads are still at a low level, and the risks to
financial stability from that market should be monitored," the
central bank said.
(Editing by Jeremy Gaunt)