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Bank of Israel Cuts Rate to Lowest in More Than Two Years

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Dec. 24 (Bloomberg) -- The Bank of Israel reduced its benchmark interest rate to its lowest in more than two years amid a European debt crisis, uncertainty regarding the “fiscal cliff” problem and slowing domestic inflation.

Governor Stanley Fischer and the monetary policy panel cut the rate by a quarter-point to 1.75 percent, the Jerusalem-based bank said on its website today. Eight of the 23 economists surveyed by Bloomberg forecast the decision, while 14 predicted no change. One forecast a half-point reduction.

“Indicators of real economic activity continue to point to weakness and further moderation in the rate of growth is likely,” the central bank said. “The level of economic risk from around the world remains high, and with it the concerns over negative effects on the local economy.”

The Bank of Israel has gradually reduced the borrowing rate from 3.25 percent in 2011 in an effort to shore up the economy amid the European debt crisis. The committee left the rate unchanged at the end of November, after an unexpected quarter-point cut the previous month.

The Israeli economy is expected to expand by 3.8 percent, the Bank of Israel said today, updating its forecast to include natural gas production. Excluding gas output, growth was revised downward to 2.8 percent, from 3 percent last quarter, it said. Growth in 2012 is forecast at 3.3 percent.

Gas Production

“Gas production requires only very small inputs of labor,” the central bank said. “Accordingly, the expected development of employment and unemployment is determined largely by the growth rate of GDP excluding, rather than including, gas production.”

Economic growth eased to an annualized 2.9 percent in the third quarter, the slowest in three years, from 3.4 percent the previous three months. Inflation slowed to 1.4 percent in November, the lowest since July. The government’s price-rise target is 1 percent to 3 percent.

The shekel has strengthened by about 6 percent against the dollar since Nov. 15, and was trading at 3.7446 shekels at 4:22 p.m. in Tel Aviv.

“The decline in the inflationary environment and the appreciation of the shekel” are the main reasons for the decision, David Reznik, head of fixed-income research at the Leumi Capital Markets division of Tel Aviv-based Bank Leumi Le-Israel, said prior to the announcement. “Central banks around the world are reducing interest rates wherever they still can.”

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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