Governor of the Bank of Israel Prof. Stanley Fischer cast the deciding vote in the Monetary Committee's meeting last week, which decided on an extraordinary mid-month interest rate cut. Three committee members wanted a 25-basis point cut, and three members wanted a 50-basis point cut. Under the Bank of Israel Law, in case of a tie vote, the committee chairperson (the Bank of Israel Governor) has an additional vote. Fischer favored the smaller interest rate cut, which lowered the interest rate to 1.5%.
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 ECB, the quantitative easing in major economies worldwide and the downward revision in global growth forecasts, the Bank of Israel’s Monetary Committee decided to reached decisions outside the regularly scheduled framework."
It elaborated, "The appreciation trend of the shekel continues. In terms of the effective exchange rate, 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. The appreciation trend was affected by, among other things, the beginning of natural gas production from the Tamar gas field, the interest rate reductions by central banks worldwide, notably the ECB, and the continued quantitative easing programs in several major economies around the world.
"Forecasts of global growth, in particular projections regarding Europe and China, have recently been revised downward. This moderation is expected to have an effect on Israel’s economy."
The Monetary Committee members noted that part of the recent sharp appreciation in the shekel was the result of monetary expansion in several countries, including expanding the quantitative easing and interest rates cut, which widened the interest rate gap between Israel and other leading countries, investors’ assessments about improvements in the balance of payments as a result of natural gas production in Israel, Israel's relatively better economic performance compared with other countries, and the expected correction in the path of fiscal policy. However, they were worried by the over-appreciation of the shekel compared with other currencies, which suggested that the foreign currency market was overestimating the strength of the effect of natural gas production on the exchange rate.
To offset the effect of natural gas production on the appreciation of the shekel, committee members suggested implementing a purchasing program with amounts to be determined based on the improvement the Bank expects in the balance of payments. The program will be in addition to the current exchange rate policy and will be operated until 2018, when the sovereign wealth fund is due to begin operating.
The Committee members believe that the latest economic data do not indicate that the improvement in the economy in January and February would continue. As for the housing market, they noted the need to balance conflicting consideration, and said that a long-term solution to the problems in the market must come from the supply side, not the demand side.
Published by Globes [online], Israel business news - www.globes-online.com - on May 22, 2013
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