Shekel Drops as Bank of Israel Cuts Interest Rate to Spur Growth

The shekel weakened for a third day after the Bank of Israel unexpectedly lowered borrowing costs to stem the rally in this year’s best-performing major currency and boost economic growth.

The exchange rate depreciated as much as 0.8 percent to 3.5404 a dollar before trading at 3.5277 by 3:12 p.m. in Tel Aviv, trimming this year’s gain to 5.9 percent, the most among 31 major peers monitored by Bloomberg. One-year interest rate swaps, an indicator of investor expectations for rates over the period, dropped 12 basis points to 1.07 percent.

The five-member monetary policy panel, which has been led by acting Governor Karnit Flug since Stanley Fischer left the bank three months ago, cut borrowing costs by a quarter of a percentage point to 1 percent today. Only one of the 18 economists surveyed by Bloomberg had forecast the decision, while the remainder had predicted no cut. The shekel strengthened to its highest level since August 2011 on Sept. 18.

“The decision shows that the central bank was interested in reacting to the appreciation of the shekel in recent days and is still concerned about a slowdown in the economy,” said Ilan Artzi, chief investment officer at Halman Aldubi Investment House in an e-mailed note after the rate cut was announced. “This is a bold, right move by the acting governor.”

The Bank of Israel under Fischer had lowered the benchmark rate by 2 percentage points since 2011, including twice in May, to combat shekel gains, which are hurting the country’s export-driven economy. The 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.

To contact the reporter on this story: Sharon Wrobel in Tel Aviv at swrobel4@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

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