Bank of Israel Cuts Rate Again as It Warns of Europe Contagion

The Bank of Israel cut its benchmark interest rate for the second time in three months as it warned that the European debt crisis is “becoming more severe and is spreading.”

The monetary policy committee lowered the rate by a quarter percentage point to 2.75 percent, the Jerusalem-based central bank said on its website yesterday. Seventeen of 21 economists surveyed by Bloomberg forecast the decision, while the remainder predicted no change.

“The rate cut is due only to what is happening abroad,” said Ori Greenfeld, head of macroeconomics at Tel Aviv-based Psagot Investment House Ltd. “If you look at the Bank of Israel’s forecasts for the domestic economy, there is no reason to lower the interest rate.”

Israel has been joined by Australia, Brazil, Denmark, Romania, Serbia, Indonesia, Georgia and Pakistan in lowering interest rates since late August in response to the European turmoil. Chile, Mexico, Norway, Peru, Poland and Sweden are also forecast by JPMorgan Chase & Co. to lower borrowing costs by the end of the first quarter.

Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, dropped six basis points to 2.60 percent, the lowest since September 2010. The yield on the 3.5 percent bond due September 2013 fell four basis points to 2.72 percent at the 4:30 p.m. close yesterday.

The shekel strengthened against the dollar by 0.4 percent to 3.7780 shekels at 7:11 p.m. in Tel Aviv.

Global Growth

The Organization for Economic Cooperation and Development said in a report released yesterday that growing doubts about the survival of Europe’s monetary union has caused global growth to stall and represents the main risk to the world economy.

“The debt crisis in Europe is becoming more severe and is spreading to other countries,” the Bank of Israel said in its statement. “The risk of Europe sliding into a recession and a significant slowdown in the global economy has risen. These negative developments are already affecting the Israeli economy and their effect is expected to intensify.”

About 40 percent of Israel’s gross domestic product is export-based with Europe and the U.S. the largest markets.

The OECD cut its economic growth forecast for Israel for 2012 to 2.9 percent from its May estimate of 4.7 percent, according to the report. The group also reduced its projection for this year to 4.7 percent from 5.4 percent. Growth will rebound to 4.7 percent in 2013, the Paris-based OECD said.

The Bank of Israel is forecasting 4.7 percent growth for this year and 3.2 percent for next year.

Israeli inflation slowed to 2.7 percent in October, within the government’s target of 1 percent to 3 percent for a second month. Housing purchase prices, which are reported alongside the consumer price index and are not included in it, dropped 0.2 percent in August-September, the last period measured, the first decline since November-December 2008.

To contact the reporter on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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