The Bank of Israel surprised analysts on Monday by lowering its benchmark interest rate to 0.1 percent from 0.25 percent, its first reduction in six months amid persisting deflation and a strengthening shekel.
The shekel dropped abruptly against both the dollar and euro after the news broke. The shekel-dollar exchange rate is up 1.14% in comparison with the representative rate set late Monday afternoon, at NIS 3.9074/$, and the shekel-euro rate was up 1.28%, at NIS 4.4165/€.
The Tel Aviv Stock Exchange, already trading at record levels, also responded. The Tel Aviv 25 Index rose 0.44% to 1,502.05 points, crossing the 1,500 point threshold for the first time ever.
The Bank of Israel explained the decision, saying, “Continued appreciation [of the shekel] is liable to weigh on growth in the tradable industries — exports and import substitutes.”
But the shekel has gained more than 3 percent the last few weeks and Israel’s inflation rate was -0.5 percent in January, with expectations of staying below 1 percent in the next year.
The central bank has largely blamed low oil and other commodity prices for the benign inflation environment.
At the same time, economic growth surged in the final three months of 2014 but taken together with the third quarter — hit hard by a Gaza war — growth in the second half the year was identical to the first six months.