Bank of Israel Unexpectedly Cuts Interest Rate to Record

Bank of Israel Governor Karnit Flug
The shekel weakened and stocks in Tel Aviv climbed after the Monetary Policy Committee, led by Governor Karnit Flug, reduced the rate by a quarter of a percentage point to 0.25 percent. Photographer: Ariel Jerozolimski/Bloomberg

Aug. 25 (Bloomberg) -- The Bank of Israel unexpectedly cut its benchmark interest rate for a second straight month to a record, in an attempt to boost an economy hit by slowing exports and the seven-week war in Gaza.

The shekel weakened and stocks in Tel Aviv climbed after the Monetary Policy Committee, led by Governor Karnit Flug, reduced the rate by a quarter of a percentage point to 0.25 percent. All 21 economists in a Bloomberg survey had expected the panel to keep the rate unchanged after last month’s surprise reduction.

Businesses close to Gaza have been most affected by Israel’s war with Hamas and other Palestinian militants groups. The fighting has also deterred tourists and dented consumer spending. Unlike previous conflicts with Hamas or Hezbollah, the Lebanese militant group, Israel entered the fighting in Gaza with an economy already losing momentum: Growth slowed in the second quarter as exports slumped due to a strong shekel.

While available data isn’t enough to assess the effect of the conflict on economic output, the fighting “occurs against the background of a slowdown in growth of the economy, and an environment of low economic growth worldwide,” the bank said in its statement announcing the rate decision.

Tourism, which accounts for about 7 percent of Israel’s economy, fell an annual 21 percent in July, according to government data.

Manufacturers had called on policy makers to help exporters by cutting the base rate to zero and buying enough dollars to keep the local currency at 3.8 to the dollar.

Shekel Falls

Israel’s currency declined 1.1 percent to 3.5707 shekels against the dollar at 4:16 p.m. in Tel Aviv, the lowest since November. The yield on the nation’s debt due March 2024 dropped five basis points to 2.59 percent, a record low. The benchmark TA-25 Index of stocks rose 0.8 percent, the most in a month.

“Reducing the interest rate is the Bank of Israel’s declaration of support for economic growth, in light of the military operation and its implications for the economy,” said Ilan Artzi, chief investment officer at the Halman-Aldubi Group, who is based in the Tel Aviv suburb of Ramat Gan. “Now the main problem is that the bank’s interest rate weapon is spent, and to encourage future growth other monetary tools will have to be used, such as buying bonds.”

To contact the reporters on this story: Amy Teibel in N at ateibel@bloomberg.net; Yaacov Benmeleh in Tel Aviv at ybenmeleh@bloomberg.net; Calev Ben-David in Jerusalem at cbendavid@bloomberg.net

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net Andrew J. Barden