Israel's central bank cut its policy rate by 25 basis points for the second time this month to 1.25 percent to "narrow the gaps between the Bank of Israel's interest rate and the rates in major economies worldwide, in order to weaken the forces for appreciation of the shekel."
The Bank of Israel (BoI) already cut its rate in a surprise move on May 13 when it said it would intervene in foreign exchange markets to weaken the shekel which has appreciated in response to due to the start of natural gas production, rate cuts by other central banks, continued quantitative easing in major economies and moderate global growth.
In its statement today, the BoI said "the expansionary policy of central banks in major advanced economies is expected to continue, according to their announcements, in coming year as well."
Other factors cited by the BoI include inflationary expectations that are slightly below the midpoint of the central bank's target, a lower budget deficit that will moderate the growth in demand, mixed global growth and government measures in the housing sector that are expected to moderate demand in the housing market.
The BOI said it would continue to monitor economic developments and use its available tool to achieve price stability, encourage employment and growth, support the financial system and "in this regard will keep a close watch on developments in the asset markets, including the housing market."
Financial markets were split in their expectations to today's policy meeting by the BoI, with those expecting a rate cut pointing to the minutes from the May 13 meeting that showed that half of the bank's monetary committee had voted for a 50 basis point reduction but Governor Stanley Fischer had used his tie-breaking vote to limit the cut to 25 basis points.
From the BoI's policy meeting in March, when it left rates steady, to the day before its unscheduled meeting on May 12, the shekel had risen by almost 3 percent against the U.S. dollar. But following the
surprise rate cut on May 13, the shekel reversed course and fell by about 3.9 percent, the BoI said.
This decline broke the trend of continued appreciation since mid-2012. Following today's rate cut, the shekel fell to 3.71 per U.S. dollar, down from 3.57 prior to the May 13 rate move, nearing the 3.73 rate at the start of this year.
In 2012 the BoI cut its policy rate by 100 basis points but May's cut was the first this year.
Israel's inflation rate fell to 0.8 percent in April from 1.3 percent in March, below the central bank's lower bound of its 1-3 percent target range.
Since the BoI's first rate cut this month, inflation expectations have risen slightly to just below 2 percent from 1.7 percent and inflation expectations for 2 years and longer range from 2.3-2.5 percent. Expectations for the BoI's policy rate one year from now range between 1.3 and 1.45 percent.
Recent indicators of economic activity show moderate growth in the first quarter and mixed trend in April, with exports up by 5.6 percent in the first quarter after declines of 10 and 5 percent respectively in the previous two quarters, bringing it back to the level in the first quarter of 2011.
In the first quarter, Israel's Gross Domestic Product rose by 0.68 percent from the fourth quarter for annual growth of 3.42 percent, up from 2.6 percent.
The government's budget plan, if approved, should cut the deficit target to 3 percent of GDP in 2014, down from 4.65 percent in 2013, moderating the growth of demand.
The BoI said the global economy continued to present a mixed picture in the past two months, with the main risks emanating from Europe, according to the International Monetary Fund, with medium
term risks include recession in Europe, fiscal crises in Japan and slower than expected growth in developing countries.