Bank of Israel Governor Stanley Fischer announced on Monday a surprise cut the prime interest rate as part of his battle to fight the appreciation of the shekel and help the economy to keep growing. The financial markets responded with the shekel-dollar rate rising more than 1.5 percent to the level of 3.61 shekels to the dollar.
Fischer announced the interest rate cut two weeks ahead of the usual end-of-the-month decision on whether to change the rate.
The dollar was worth only 3.55 shekels last week, dropping over the past several weeks from the relatively lofty level of 3.8 shekels to the dollar.
A lower shekel-dollar rate hurts exports because foreign buyers have to pay relatively more dollars than they would when the shekel is worth less. In addition, exporters make less money after converting foreign dollars into shekels.
Factors in the lower rate are the anticipation of tax revenue from Israel’s natural gas bonanza, which came on-stream several weeks ago, Warren Buffet’s $2 billion purchase of the remaining shares of the Israel-based Isracar tool-making company, the possibility of a $1 billion buyout of Waze by Facebook, and the relatively stable Israeli economy.
Fischer cut the rate by a quarter of a percent, with the new 1.5 percent rate making the shekel less attractive to foreign investors.
After the Bank of Israel’s two small purchases of dollars the past three weeks in an effort to keep speculators from forcing the shekel-dollar rate any lower, Fischer announced on Monday a massive dollar-buying plan on the scale of his purchases several years ago when the shekel-dollar rate sank to 3.30.
The Bank of Israel said the decisions to lower the rate and buy dollars 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 European Central Bank, the quantitative easing in major economies worldwide and the downward revision in global growth forecasts.”
The Bank of Israel added that global growth forecasts, especially for Europe and China have been revised downward, which effect Israel’s economy.
It explained that the program to buy dollars takes into account “the effects on the financial account resulting from the natural gas production” that will result in foreign exchange payments by the gas companies.
“As in the past, the Bank of Israel will continue to operate in the foreign exchange market in cases of exchange rate fluctuations which are not in line with fundamental economic conditions, or when conditions in the foreign exchange market are disorderly,” the Bank of Israel added.