Bank of Israel Surprises With First Cut Since Fischer

The Bank of Israel unexpectedly lowered interest rates for the first time since Stanley Fischer stepped down as governor, citing the shekel’s gains and the U.S. decision to delay withdrawing monetary stimulus.

The five-member monetary policy panel, which has been led by acting Governor Karnit Flug since Fischer left the bank three months ago, cut the benchmark rate by a quarter of a percentage point to 1 percent, the lowest in almost four years. Only one of the 18 economists surveyed by Bloomberg had predicted the cut, with the remainder saying they expected no change.

The Federal Reserve said last week it would refrain from reducing the $85 billion pace of monthly bond buying, because it needs to see more signs of a lasting improvement in the economy. The decision prompted an appreciation in emerging-market currencies including the shekel, which rose to a two-year high.

“If the Fed continues with the purchases, maybe there will be more cuts” in Israel, said Rafael Gozlan, chief economist at I.B.I. - Israel Brokerage & Investments Ltd., and the only economist surveyed who had forecast the decision. “If not, then it may be that we’ve seen the last.”

The shekel declined after the rate cut, dropping 0.5 percent to 3.5308 per dollar.

Rafi Melnick, a member of the monetary policy committee, said yesterday’s cut was “aimed at helping the economy deal with the great uncertainty experienced in the international markets following the Fed’s announcement.”

Exports Drop

Melnick told Army Radio that an interest-rate gap had opened between Israel and other countries, boosting the shekel and putting the economy at risk of another slowdown.

The bank yesterday cited the strengthening shekel and the stagnation in exports, the main engine of growth in the past decade. Exports are expected to drop 1.1 percent this year, according to a Bank of Israel forecast.

Under Fischer, the bank had lowered its benchmark rate by 2 percentage points since 2011, including twice in May, when it also announced a $2.1-billion plan to cap the shekel’s gains by buying dollars. The currency has gained 5.7 percent this year, the most among 31 major currencies tracked by Bloomberg. The Israel Export & International Cooperation Institute has urged the government and central bank to cap the increase.

Flug presided over yesterday’s meeting in the absence of a permanent replacement for Fischer. Two nominees have withdrawn after questions arose about their alleged conduct.

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