Itongadol.- In a surprise move, the Bank of Israel announced Monday that it was slashing its interest rate by 0.25% to a level of 1.5%. The decision will come into effect this Friday.
The unusual decision was made in the middle of the month in response to sharp interest rate reductions around the world due to the European debt crisis.
Central bank officials realized that the gap between the interest rate on the shekel and the interests on other currencies had increased significantly. Fearing a sharp appreciation of the shekel in response to the increased gap, the bank decided to announce an immediate interest rate cut.
The Bank of Israel explained in a statement that the decision was made "in light of the continued appreciation of the shekel, taking into account the start of natural gas production from the Tamar gas field, interest rate reductions by many central banks – notably the ECB, the quantitative easing in major economies worldwide and the downward revision in global growth forecasts."
The central bank\’s Monetary Committee usually delivers its interest rate decision on the last Monday of each month. This year, the bank decided to reduce its monthly announcements from 12 to 10, explaining that the data flow speed in the summer months does not justify a monthly decision.
After failing to make a decision on the interest rate in April, the Monetary Committee now realized that too much time had passed since the last interest rate decision and decided to intervene in the middle of May.
The bank further announced on Monday that beginning this year, and in coming years, it would purchase foreign exchange in order to offset the effect of natural gas production on the exchange rate.
The bank said it would buy some $2.1 billion by the end of the year, and will then reexamine the issue once a sovereign wealth fund is established to manage the State\’s income from natural gas royalties.