Governor of the Bank of Israel David Klein announced today that the Bank of Israel's key interest rate would be cut by 0.4% for December, to 5.2%. This is the lowest rate for two years. The amount of the cut is in the middle of the range of market forecasts.
Since the end of 2002, the Bank of Israel has cut its key interest rate by 3.9% in several small increments not exceeding 0.5%.
The effective rate of interest on Bank of Israel sources will be 5.9%, and the real rate will be 4.8%, still considered high. The interest rate on bank overdrafts is much higher, at around 14%.
The gap between interest rates in Israel and in the US has narrowed considerably, and amounts to 4.6%, the smallest since 2000. Israel's risk premium on international markets continues to fall, and is now 0.6% for five years, the lowest since the Palestinian intifada broke out in September 2000.
The latest cut in interest rates comes after a fall in inflation expectations for the coming year to just over 1%, which is at the lower end of the target range for price stability. The Bank of Israel's financial models indicate that it will be possible to meet the inflation target in the next two years while still gradually lowering interest rates.
In a recent survey of the Israeli economy, London-based HSBC analyst David Lubin predicted that the Bank of Israel key rate would fall to 4.5% by June 2004. His prediction was based on Israel's healthy balance of payments position.
With Israel currently in a period of negative inflation - inflation for the ten months to October 2003 was minus 1.5% - analysts and commentators say there is room for further interest rate cuts, as real rates remain high by the standards of the industrialized countries.
Full Bank of Israel announcement
Published by Globes [online] - www.globes.co.il - on November 24, 2003