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Bank of Israel Cuts Rate for Third Time Amid European Slowdown

The Bank of Israel reduced its benchmark interest rate for a third time in five months, saying that while global markets are showing optimism, the European debt crisis remains a threat to domestic growth.

The monetary policy committee, led by Governor Stanley Fischer, reduced the rate by a quarter-percentage point to 2.5 percent, the Jerusalem-based central bank said on its website yesterday. Ten of 23 economists surveyed by Bloomberg predicted a cut, and the remainder forecast no change.

“The Bank of Israel didn’t save its ammunition, but it doesn’t have any reason to,” Amir Kahanovich, chief economist at Clal Finance Brokerage Ltd. in Tel Aviv, said in a telephone interview. “A later rate cut might have been too late. He prefers to risk inflation rather than a crisis in demand,” Kahanovich said referring to Fischer.

The central bank and the Finance Ministry have reduced their growth predictions for this year, citing the impact of the European debt crisis. Exports make up about 40 percent of the Israeli economy and Europe is one of the largest markets. Inflation eased in December to an annual 2.2 percent, the slowest pace in more than a year.

“The macroeconomic data on the euro zone continue to indicate the start of a recession,” the bank said in its statement. “The slowdown in growth in Israel’s economy is seen in exports and in domestic demand, against a background of weakness in the global economy.”

Cut Unexpected

Traders have been betting against a cut, as the U.S. economy recovers and global markets show improvement. The shekel had appreciated to its strongest against the dollar in almost a month prior to the decision. Interest rate swaps had risen to their highest in more than a month.

“Its preferable to prevent disease than to cure it,” Amir Haik, chief economist at Union Bank of Israel Ltd. in Tel Aviv, who predicted the cut, said in a telephone interview. “It’s better to cut by a quarter-point now than to wait and have to cut by a half-point later, which could result in a shock to the market.”

Haik said the rate reduction yesterday should give the central bank one or two months of “breathing room” in which it won’t have to act, unless there is a significant worsening of the situation in Europe.

The Finance Ministry cut its growth forecast to 3.2 percent from 4 percent, Finance Minister Yuval Steinitz said Jan. 18. The Bank of Israel on Dec. 26 lowered its prediction for 2012 to 2.8 percent from September’s estimate of 3.2 percent.

Shekel Weakens

The shekel weakened to 3.7780 a dollar at 7:33 p.m. in Tel Aviv. The currency was at 3.7642 before the decision was announced.

Israel’s two-year interest-rate swaps, an indicator of investor expectations for interest rates over the period, fell to 2.48 percent at 7:34 p.m. in Tel Aviv. The swaps were at 2.58 percent just before the decision was announced at 5:30 p.m.

Economists’ 12-month inflation expectations remained unchanged at 2.3 percent, the central bank reported Jan. 17. The government’s target range for inflation is 1 percent to 3 percent.

The central bank last cut its benchmark lending rate in November, lowering it a quarter-point.

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