Bank of Israel Surprises With First Post-Fischer Cut

The Bank of Israel unexpectedly reduced the benchmark lending rate for the first time since Stanley Fischer stepped down as governor, after the shekel appreciated to its strongest level in two years.

The five-member monetary policy panel, which has been led by acting Governor Karnit Flug since Fischer left the bank three months ago, cut borrowing costs by a quarter of a percentage point to 1 percent. Only one of the 18 economists surveyed by Bloomberg had forecast the decision, while the remainder had predicted no cut.

“The strength of the shekel, the low-inflation environment, the slowdown in export activity support an additional rate cut,” Rafael Gozlan, chief economist at I.B.I. - Israel Brokerage & Investments Ltd., said before the announcement.

Exports, the main engine of growth of the Israeli economy in the past decade, have stagnated this year as shekel strengthens.

The Bank of Israel under Fischer had lowered the benchmark rate by 2 percentage points since 2011, including twice in May, to help spur economic growth. Israel’s economy will probably expand 3.4 percent in 2013, the same as last year, the Central Bureau of Statistics said Sept. 16. The estimate missed the central bank’s June forecast of 3.8 percent.

Natural Gas

The central bank in May announced a plan to buy $2.1 billion by the end of the year in an effort to help moderate shekel gains, spurred this year by first-time natural gas production. Since the end of May, the Israeli currency strengthened by about 4.6 percent, making it the sixth best performing currency during that period among the 31 major currencies tracked by Bloomberg.

The shekel’s gains prompted the Israel Export & International Cooperation Institute to call on the government and the central bank to halt the currency’s appreciation.

The bungled appointment of the Bank of Israel’s next governor has not affected the central bank’s operations, Reuben Gronau, a member of its monetary policy panel, said last month, offering reassurance to markets the vital institution is in good hands.

Two nominees fielded by Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid withdrew after questions about alleged conduct arose. Helming it in the meantime is the hand-picked deputy Fischer recommended to replace him, twice-spurned Flug.

Three more candidates are currently being considered: Mario Blejer, a former Argentina central banker; Zvi Eckstein, a former Bank of Israel deputy governor; and Victor Medina, a onetime Finance Ministry director general and former chief executive officer of United Mizrahi Bank Ltd.

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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