Bank of Israel Governor David Klein cut the interest rate by
0.2 percentage points bringing the central bank's prime
lending rate down to 3.7 percent, the lowest in Israel's
history. In his statement yesterday on monetary policy for
January 2005, Klein explained that it was possible to reduce
the rate because "the expected rate of inflation next year is
within the range of the government's target of price
stability, that is, 1-3 percent."
Other factors included the stability in the foreign currency
market and persistent reductions in yields in the government
bond market.
Israel's rate is going down while interest rates in the US
are going up. Other countries are holding steady.
Nonetheless, the central bank warned against complacency.
"The uncertainty deriving from the markets' potential
reaction to the large deficits in the U.S. budget and current
account is likely to affect the future level of the interest
rate and growth in the U.S., and hence also, directly and
indirectly, Israel's economy, which cannot be ignored."
Klein noted that the economy was on a path of growth,
"additional jobs are being created, and there are signs of a
slow downward trend in unemployment."
This reduction in interest rate is Klein's 60th change to the
rate, and the last in his current term which ends at the end
of the secular year.
The government is expected to announce its choice for the
next governor real soon now. Klein may be selected for a
second term, or another candidate may be chosen to take over
in January.
Israel's rate of 3.7 percent is now much lower than in
Britain, where the central bank rate is 4.75 percent and
rising. It is also lower than in Australia (5.25 percent) and
Brazil (17.75 percent).
However, it is still higher than in the US, where the
interest rate was raised earlier this month to 2.25 percent.
Israel's rate is also higher than in the EU countries (2
percent), Switzerland (0.75 percent) and Japan (0
percent).
The reduction was in line with analysts' expectations. They
said Klein may reduce rates by another 0.2 percent next
month.
Yields on Bank of Israel one-year notes, Makam, decreased to
only 4.3 percent from 5.2 percent in May. Yields on
government bonds have also fallen, indicating public
confidence that the government will continue to maintain
fiscal discipline.
In what can be seen as an effort to improve Klein's image
ahead of the choosing of the next bank governor next month,
the bank stated that "in the last two years the central bank
has shifted the focus of rate policies in order to support
economic growth."
Much of the criticism of Klein focused on his reluctance to
lower rates faster in order to accelerate growth. The bank
noted that interest rates were reduced from 9.1 percent last
December to 3.7 percent now.
