Bank of Israel cuts policy rate 25 bps to 2.25%

By Central Bank News

The Bank of Israelcut its interest rate by 25 basis points to 2.25 percent to help ward off any negative effects on the economy from developments in Europe. A decline in inflation to below the center of the bank’s target range gave the bank room to cut, the bank said, adding the rate cut was expected by most forecasters.

“The interest rate reduction will contribute to strengthening the Israeli economy’s ability to deal with the impact of potential negative consequences from the global economy,” the bank said in a statement.

The bank also said that the future path of interest rates depends on “developments in the inflation environment, growth in Israel, the global economy, monetary policies of major central banks, and developments in the exchange rate of the shekel.”

“The level of economic risk in the world due to developments in Europe remained high, and with it the concern of negative effects on the domestic economy,” the bank said.

The Israeli inflation rate was unchanged in May, below forecasts, mainly due to a drop in food prices, and inflation forecast have now been cut. The rate of inflation over the previous 12 months fell to 1.6 percent, below the center of the bank’s target range of 1-3 percent, the bank said.

The Israeli central bank last changed its rates in February, when it cut by 25 basis points, citing a slowdown in economic activity, both in exports and domestic demand.

It said then that it expected the slowdown to continue against the backdrop on weakness in the global economy, primarily from Europe, where data showed the euro zone would slip into recession this year.

Interest rates in Israel have been on a declining path since the fourth quarter of 2011 when the central bank wanted to counter a slowing economy amid growing concern over the financial crises in Europe. Inflation was also moderating, giving the bank room to ease rates.

Interest rates were cut by 25 basis points in both October and December, 2011, ending at 2.75 percent at year-end. Rates were the cut to their current level in February and have been maintained since then.