Bank of Israel unexpectedly cuts key interest rate on low inflation, Gaza

by Reuters
Monday, 28 July 2014 13:46 GMT

(Adds details, central bank comments, shekel)

JERUSALEM, July 28 (Reuters) - The Bank of Israel lowered its benchmark interest rate by 25 basis points to 0.5 percent on Monday for its first reduction in five months, saying inflation was low, the strong shekel was harming exports and the war in Gaza would weigh on economic growth.

The central bank also narrowed the interest rate corridor in the credit window and the commercial bank deposit window to +/- 0.25 percent from +/-0.5 percent.

The move, which brought the lending rate to match its all-time low set in 2009, came in contrast to a Reuters poll that had shown all 10 economists forecasting no rate move this month.

But the central bank cited a decline in the annual inflation rate in June to a seven-year low of 0.5 percent, well below a government target of 1-3 percent.

At the same time, it said that although economic data indicate a continuation of moderate growth, goods exports and private spending were weak, growth in employment has halted and the war against Hamas and other Islamic militants will harm growth.

"Its moderating effect cannot yet be estimated," the Bank of Israel said of the three-week conflict.

Another reason for the rate cut was a strengthening shekel, which the central bank said weighs on foreign trade - already being hurt by a virtual standstill in global trade.

The shekel weakened to 3.43 per dollar after the cut, a three-week low, from its fixing of 3.4270

Prior to the fighting, Israeli growth this year was forecast at 2.9 percent after a 3.3 percent pace in 2013. (Reporting by Steven Scheer; Editing by Toby Chopra)

Our Standards: The Thomson Reuters Trust Principles.