Reasons for Bank of Israel governor’s unexpected move is growing fear of renewed slowdown in global economy
Bank of Israel Governor Stanley Fischer made last week a dramatic turn in his policy,for the first time in two and a half years, reducing thebenchmark interest rate for October 2011 by 25 basis points to 3%.
The move took most analysts by surprise.
The consensus among analysts was that the Governor would keep the interest rate unchanged.
The moves places Israel with Brazil and Turkey who carried out similar steps in an effort to reduce lending costs in the midst of the global slowdown.
Reasons for Bank of Israel governor’s unexpected move is growing fear of renewed slowdown in global economy, which could badly affect Israeli economy. In a statement issued by the Bank it noted that "the decision to reduce the interest rate for October to 3% is based mainly on the negative turnaround in the global economy, is consistent with the return of inflation to within the target range of price stability, and is intended to support growth while preserving financial stability."
Economists reacting to the move noted that the drop in the interest rate reduces manufacturers' costs and encourages growth, and is therefore meant to help encourage economic activity.
The main factor which allowed Fischer to reduce the interest rate was the drop in the inflation rate. Since the publication of the consumer price index for August about 10 days ago, the expected inflation has fallen to only 2.3% - within the annual inflation target range set by the government (1-3%).
