May 28 (Bloomberg) -- The Bank of Israel cut borrowing costs for a second time this month, narrowing the gap with rates in major economies as it seeks to prevent a currency appreciation from undermining growth.
Governor Stanley Fischer and his monetary committee lowered rates yesterday by another 0.25 percentage point to 1.25 percent, the lowest in more than three years. The shekel, which traded at a 21-month high in early May, lost as much as 0.9 percent against the dollar after the bank announced it wanted to “weaken the forces” for its appreciation. Today, it strengthened by 0.3 percent to trade at 3.7056 at 12:53 p.m.
“Fischer’s foremost objective is to keep the shekel no stronger than 3.70 to the dollar,” said Shmuel Ben Arie, head of shekel wealth management at Pioneer Private Wealth Planning in Herzliya. “This is the minimum currency exchange rate that is necessary for the Israeli economy to grow at least 3 percent this year.”
Low interest rates in major economies and natural gas finds in Israel have fueled the shekel’s rise, prompting Fischer and his monetary committee to gradually lower the benchmark rate from 3.25 percent in 2011 to help spur growth in Israel’s export-driven economy. Exports make up about 40 percent of Israel’s economy and are hurt by a stronger shekel.
The currency resisted efforts to weaken it. With just weeks to go before he steps down after eight years, Fischer began intervening in the currency market last month for the first time in almost two years. He also accelerated the pace of rate cuts, including a surprise reduction two weeks ago.
Central banks overseeing about a quarter of the world’s gross domestic product have cut interest rates this month, spanning the globe from the euro area and Australia to Turkey and Sri Lanka.
“Fischer is joining the global currency war,” said Yaniv Hevron, head of macro-strategy at Ramat Gan, Israel-based Excellence Nessuah Investment House Ltd. “I don’t think we will see another cut next month, but there will be other cuts in coming months.”
Fischer, who during his two decades as an MIT professor helped to educate the current heads of the Federal Reserve and the European Central Bank, has steered toward the U.S. model during his tenure at the Israeli central bank. His dual focus on employment and growth alongside price stability resembles the Fed’s and has marked a shift at the Bank of Israel, where previous governors placed an ECB-style emphasis on inflation.
Fischer earned a reputation as a trailblazer by being the first central banker to cut rates in 2008 at the start of the global economic crisis, and the first to raise rates the following year in response to signs of financial recovery.
“Bank of Israel policy during Fischer’s term has been in the vanguard in terms of timing, direction and the extent of interest rate changes,” said Alex Zabezhinsky, chief economist at Tel Aviv-based DS Securities & Investments Ltd.
The two reductions in a single month was the first for the Israeli central bank since November 2008.
Ori Greenfeld, head of macroeconomic research at Psagot Investment House Ltd. in Tel Aviv, said the bank didn’t have much to lose by paring the benchmark rate.
“Given the low inflation and slow growth, lowering the interest rate doesn’t have any real costs,” Greenfeld said. It may affect the housing market by fueling already high prices, “but we already know this is of secondary importance to the Bank of Israel,” he said.
Economic growth, excluding new gas output, is forecast to slow to 2.8 percent in 2013, from 3.2 percent last year, the Bank of Israel said in March. Including first-time natural gas production from a new field, it is forecast to grow 3.8 percent.
Inflation slowed to a six-year low of 0.8 percent in April, adding to economic evidence that has spurred policy makers to cut rates. Inflation expectations for the coming year are slightly below the midpoint of the government’s 1 percent to 3 percent target, the bank said yesterday.
Ten of 23 economists surveyed by Bloomberg forecast the rate decision, while the remainder predicted no change.
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