Bank of Israel Unexpectedly Cuts Rates; Stocks, Bonds Advance

The Bank of Israel unexpectedly cut its benchmark rate to a record low of 0.1 percent, as it seeks to weaken the shekel and pull the country out of deflation. The currency declined, and stocks and bonds gained.

The five-member monetary policy panel, led by Governor Karnit Flug, reduced borrowing costs from 0.25 percent on Monday. Three of 23 economists surveyed by Bloomberg had forecast a smaller cut, while the rest predicted no change. The bank’s last change to the rate was a cut in August.

The shekel plunged, dropping 1.2 percent to 3.9037 per dollar at 5 p.m. in Tel Aviv, heading for a one-month low. The main stock index added 0.4 percent and yields on government bonds due in 2024 fell 10 basis points to 1.74 percent.

The Bank of Israel is pushing rates toward zero and considering alternative tools as it seeks to revive an economy growing at the slowest pace for five years, and halt the decline in consumer prices. Last year’s growth rate of 2.9 percent was the weakest since 2009, and the country has experienced several months of deflation, with consumer prices falling 0.5 percent in 12 months through January.

The rate cut “is a preventative measure meant to avoid a slide into a deflationary reality,” Yaniv Pagot, chief strategist at Ayalon Group Ltd. in Ramat Gan, said by phone. “Quantitative easing steps in the not so distant future cannot be discounted.”

‘Unconventional Tools’

The Bank of Israel has signaled that it’s ready to follow the U.S. Federal Reserve and European Central Bank in using other instruments to stimulate the economy.

The bank said on Monday that it will “examine the need to use various tools to achieve its objectives,” echoing comments made in December when it said “unconventional tools” may be required.

The bank said its latest cut aims to return inflation rate to its 1 percent to 3 percent target range within a year “and to support growth while maintaining financial stability.”

The Bank of Israel has reduced rates 13 times since 2011 in a bid to help boost growth. It has also bought foreign currency to weaken the shekel and make exports more competitive.

While the currency weakened by about 9 percent against a basket of currencies between July and December, it has recouped most of the decline since then.

The rate cut comes amid “a global currency war in which Israel cannot allow itself to lose its global competitiveness,” Shlomo Maoz , chief economist at S.M. Tel Aviv Investments Ltd., one of the three economists who predicted a rate cut, said by phone after the decision. It “signals to the market that the Bank of Israel will not allow an appreciation of the shekel” until the world economy rebalances, he said.

The bank is also acting at a time when “the hands of the Finance Ministry are tied” because of elections next month, Maoz said.

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