The Bank of Israel today announced that it is cutting the interest rate by 25 basis points from 1.75% to 1.5%, effective May 17, and also announced a plan for expanded purchases of $2.1 billion through the end of 2013.
The Bank of Israel said, "In light of the continued appreciation of the shekel, taking into account the start of natural gas production from the Tamar gas field, interest rate reductions by many central banks - notably the European Central Bank, the quantitative easing in major economies worldwide and the downward revision in global growth forecasts, the Bank of Israel’s Monetary Committee reached two decisions outside the regularly scheduled framework: to reduce the monetary interest rate by 0.25 percentage points to 1.5%, effective Friday, May 17; and, beginning this year, and in coming years, the Bank of Israel will purchase foreign exchange in order to offset the effect of natural gas production on the exchange rate."
The move comes some seven weeks before Governor of the Bank of Israel steps down at the end of June.
The Bank of Israel said that the shekel has appreciated by 2.4% in the past month and by 5.4% in the past three months. "The shekel’s strength against the dollar and the euro during these periods stood out markedly in comparison with other currencies’ movements vis-à-vis the dollar and euro." It cites the start of gas production from the Tamar field, interest rate cuts by central banks worldwide, and ongoing quantitative easing programs in several major economies around the world.
The Bank of Israel added that global growth forecasts, especially for Europe and China have been revised downward, which effect Israel’s economy.
As for the new dollar purchasing plan, the Bank of Israel said that, to prevent the Dutch disease (the massive influx of foreign currency), it would purchase foreign exchange in line with the its assessment of the effect of the natural gas production on the balance of payments. "In 2013, the improvement in the current account is estimated to be about $2.8 billion. Taking into account the effects on the financial account resulting from the natural gas production (foreign exchange payments by the gas companies), the Bank of Israel will purchase about $2.1 billion by the end of the year within the framework of this plan. This program will be revisited when a “wealth fund” begins operation, which is expected to be during 2018."
The Bank of Israel said, "The amounts which will be purchased within the framework of this plan will be added to the Bank of Israel’s foreign exchange reserves, but will be managed separately, with a longer term investment horizon."
It added, "The foreign exchange purchase plan serves as an additional instrument of the Bank of Israel’s exchange rate policy. As in the past, the Bank of Israel will continue to operate in the foreign exchange market in cases of exchange rate fluctuations which are not in line with fundamental economic conditions, or when conditions in the foreign exchange market are disorderly."
Published by Globes [online], Israel business news - www.globes-online.com - on May 13, 2013
© Copyright of Globes Publisher Itonut (1983) Ltd. 2013