May 27, 2013 / 3:11 PM / 6 years ago

UPDATE 1-Israel cuts interest rates for second time this month to curb shekel

JERUSALEM, May 27 (Reuters) - The Bank of Israel cut its benchmark interest rate on Monday for the second time this month as it continues to battle against the shekel’s appreciation, which poses a risk to export growth.

After unexpectedly cutting the benchmark at an unscheduled meeting on May 13, the central bank reduced it by another quarter point on Monday to 1.25 percent, its lowest level since March 2010.

The move had been expected by six of 13 economists polled by Reuters, while seven others had forecast no move.

Signs at the start of this year that Israel’s economy was improving have waned while the shekel has gained sharply in recent months due to Israel’s relatively high interest rates, threatening to further harm exports that account for 40 percent of economic activity.

“The (Monetary Policy) Committee decided to reduce the interest rate and thus narrow the gaps between the Bank of Israel’s interest rate and the rates in major economies worldwide, in order to weaken the forces for appreciation of the shekel,” the Bank of Israel said in a statement after Monday’s rate cut.

At its last scheduled meeting on March 24, the monetary policy committee (MPC) had kept the benchmark rate on hold for a third straight month.

Minutes of the May 13 rate decision showed that half the MPC’s six members voted for a steeper half-point rate reduction but Bank of Israel Governor Stanley Fischer broke the tie by voting for a less aggressive move that was accompanied by a Bank of Israel plan to buy $2.1 billion of foreign currency over the rest of 2013.

Since the rate cut earlier this month, the shekel has weakened to 3.70 per dollar from about 3.57, a nearly 21-month peak. The shekel had appreciated on the heels of a widening rate gap with other countries and the start off natural gas production off Israel in March that will help the country’s balance of payments.

Israel’s economy is forecast to grow 2.8 percent this year excluding natural gas production, slower than a 3.2 percent pace in 2012. (Reporting by Steven Scheer; Editing by Susan Fenton)

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