Bank of Israel Expected to ‘Goose’ Economy With Rate Slash

Already at 0.1%, there wouldn't seem to be much opportunity for the Bank of Israel to cut interest rates further – but that is exactly what economists are expecting later Thursday.

Bank chairperson Karnit Flug is expected to announce a cut of a quarter of a basis point in the rate. At 0.075%, the interest rate would be the lowest Israel has ever experienced.

The impetus to cut already historically low interest rates comes as a result of a report last week showing that economic growth in Israel in the first half of the year was far weaker than previously thought. The annual growth rate, according to that report, was barely above 1%, considered recession-level.

Extremely low inflation – in some areas of the economy, deflation – attests to weak economic performance, and cutting interest rates is one of the few tools the central bank has to “goose” the economy into action, making money cheaper for loans.

The dollar shot up over the Yom Kippur holiday, rising in value against the shekel nearly 1% since Monday.

While cheaper money could conceivably prompt more borrowing and spending, it will also likely exacerbate the already high cost of housing.

With bank interest rates set to sink even further and the stock market increasingly volatile, real estate remains one of the few – if expensive – outlets for money.

But, as a result of the expected interest rate cuts, the costs of available housing is likely to rise even further as more shekels chase the limited supply of homes, experts said.

Source: http://www.israelnationalnews.com/News/News.aspx/201013

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