The Bank of Israel has announced that it will stop paying commercial banks interest on dollar deposits for less than a month. The Bank of Israel's decision means that commercial banks will not be able to make a profit on the foreign currency they deposit overnight or for a week at the central bank.
The Bank of Israel said that its decision will remain in effect until further notice.
Until September 23, the Bank of Israel paid LIBOR minus 0.25% on commercial banks' foreign currency deposits. On that date, the Bank of Israel lowered the interest paid on these deposits to 2%, and has now cut the interest rate to zero.
Capital inflows to Israel have been increasing in recent months, which the Bank of Israel said has resulted in Israeli banks depositing foreign currency with it in order to make a profit on the spread between the interest rate that the Bank of Israel was paying on these deposits and the lower interest rate that the commercial banks were paying their customers.
The capital inflow is because of the financial crisis in other countries. The financial crisis in the US has caused Israelis to withdraw risky dollar investments and bring the money back home because the Israeli capital market has been weathering the crisis fairly well.
Published by Globes [online], Israel business news - www.globes-online.com - on October 15, 2008
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