Bank of Israel cuts key interest rate again, sets it at 1.25%

Bank of Israel Governor Stanley Fischer has decided to reduce Israel's key interest rate by 0.25 percentage points to 1.25% for June, its lowest level since March 2010. The move is meant to stem the shekel's appreciation and stabilize the foreign currency exchange.

Israel's central bank had alreadycut benchmark interest rates in early May, in what was considered an unexpected move prompted by slumping dollar exchange rates. Monday's decision was the first time in five years that the bank declared an interest cut twice in the same month, bringing rates down by 2% since March. The bank has reduced interest rates eight times over the past 20 months.

Monday's foreign currency exchange experienced a mixed trend following the announcement: The dollar added 0.25% and was set at 3.705 shekels, and the euro dropped by 0.28% and was set at 4.798 shekels.

"The decision to reduce the interest rate for June 2013 by 0.25 percentage points, to 1.25%, is consistent with the Bank of Israel's interest rate policy, which is intended to entrench the inflation rate within the price stability target of 1-3% a year over the next 12 months, and to support growth while maintaining financial stability," a statement by the bank's Monetary Committee said Monday.

"The path of the interest rate in the future depends on developments in the inflation environment, growth in Israel and in the global economy, the monetary policies of major central banks, and developments in the exchange rate of the shekel.

"The inflation environment reflected by increases in actual prices, and by inflation expectations, is moderate. In the past 12 months, the Consumer Price Index increased by 0.8%, below the lower bound of the inflation target range. Inflation expectations for the coming year, based on various sources, are slightly below the midpoint of the inflation target.

"The Bank of Israel will continue to monitor developments in the Israeli and global economies and in financial markets, particularly in light of the continuing uncertainty in the global economy. The bank will use the tools available to it to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, and in this regard will keep a close watch on developments in the asset markets, including the housing market."