* Rate cut to 0.25 percent from 0.50 percent
* Reuters poll: All 10 economists saw no rate move
* Central bank chief: Gaza fighting, global slowdown spurred
* Tel Aviv shares gain, shekel weakens
(Adds central bank governor comments)
By Steven Scheer
JERUSALEM, Aug 25 Fears that weeks of fighting
with Hamas will harm an Israeli economy already hurt by a global
slowdown led the Bank of Israel to reduce interest rates for a
second month in a row on Monday.
After a surprise reduction a month ago, the central bank
again lowered its benchmark short-term interest rate
by a quarter-point to 0.25 percent - an all time
low. All 10 economists polled by Reuters had forecast no move.
"Karnit joined the war effort," said Ofer Klein, head of
economics and research at Harel Insurance and Finance, referring
to Bank of Israel Governor Karnit Flug.
"It is hard to imagine that without the military operation
in the background, the Bank of Israel would choose such an
extreme move especially when the United States is already
talking about raising interest rates."
Israel launched an offensive against Hamas fighters in Gaza
on July 8 after cross-border rocket strikes by militants
intensified. Thousands of rockets have been fired into Israel,
putting consumers off shopping, damaging tourism and curtailing
manufacturing activity - particularly in southern plants near
"We're not in a recession but we are definitely in a
slowdown in activity," central bank chief Flug told Israel Radio
following the rate cut.
"We saw this (slowing) in the quarter before the fighting...
mainly because of the situation in the global economy, the
reduced demands in our main markets and joining this trend now
is an additional slowdown as a result of the effects of the
fighting," she added.
The central bank has estimated the conflict will knock half
a point off economic growth. "That's not negligible, and of
course businesses in the south (where most Gaza rockets are
targeted) feel it much more strongly," Flug said.
The bank previously forecast an expansion of 2.9 percent
this year but it will publish an updated estimate next month.
In the second quarter, the economy grew an annualised 1.7
percent according to the government's preliminary estimate, well
below expectations of a 2.5 percent rise and slower than a 2.8
percent pace in the first three months of the year.
"There was a further slowdown in economic growth,
particularly in goods exports, even before the deterioration in
the security situation," the Bank of Israel said in a statement
accompanying the rates decision.
It added that labour market data indicate a halt to the
improvement in employment and it foresaw in particular an
extended negative impact in tourism and in private consumption.
The previous rate of 0.5 percent had matched that seen
during the height of the global financial crisis in 2009 but the
benchmark rate had never been lower until today. The rate has
gradually fallen from a high of 3.25 percent in mid-2011.
Two moves in as many months is rare in Israel - last seen in
May of 2013 when the central bank cut rates twice. But the
reduction came amid a seven-year low in the inflation rate and
data showing Israel's economy was weakening.
Israel's annual inflation rate eased to 0.3 percent in July
- below the government's target range of 1-3 percent. Some
policymakers have blamed weak consumer demand for the benign
"There was an additional decline in the inflation
environment this month," the central bank said. It added that
expectations in the coming year are close to 1 percent.
Israel's shekel weakened by 1.7 percent this month
versus a basket of currencies and "continued depreciation will
support a recovery in exports and in the tradable sector," the
Bank of Israel said.
Jonathan Katz, economist at Leader Capital Markets, said he
thought the central bank would wait a few months before lowering
"The combination of the decline in inflation, a decline in
inflation expectations, a moderation of economic activity in the
second quarter even before the Gaza operation and a global
picture that is not really encouraging - especially in Europe
and Japan - supported the decision to lower interest rates," he
After the rates announcement, the shekel weakened to 3.57
per dollar from 3.5430 while key Tel Aviv stock indexes rose 0.8
Flug said the main short-term influence is expected to be in
the foreign exchange market, in which the shekel has weakened
more than three percent against the dollar the past month to a
six-month low - after reaching a three-year high last month and
prompting calls from exporters for aggressive action.
"I think that this lowering of the interest rates will
contribute to the depreciation, and this will strengthen the
ability of exporters to compete in the world, remembering that
the world is still in very moderate growth and our main markets
are suffering so the ability to strengthen the competitiveness
of exports is very important especially at a time like this,"
Harel's Klein does not believe the low rate environment will
remain for long. "When interest rates start to rise around the
world around the middle of 2015, Israel's rates will also rise,"
(Reporting by Steven Scheer; Additional reporting by Allyn
Fisher-Ilan; Editing by Toby Chopra)