Interest Rate Hits 2.75%: High Among Peers

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The Bank of Israel monetary committee cut Israel's interest rate for December by 25 basis points to 2.75%, after leaving it unchanged last month and cutting it by 25 basis points for October. The Bank of Israel, led by internationally-acclaimed American-Israeli Governor Stanley Fischer, believes that the interest rate cut, together with the recent weakening of the effective exchange rate of the shekel, should help Israel's economy deal with the difficulties confronting it.

The interest rate cut was expected by a majority of analysts, with many analysts also expecting further cuts in the interest rate to 2-2.25% in the first half of 2012. Even with the rate cut, the current base interest rate is still compares favorably to most Western nations, including United States (0.25%), Canada (1%), the U.K. (0.5%), European Monetary Union (1.25%) and Japan (0.1%). In fact, Israel has the seventh-highest interest rate among the 34 OECD member nations. Comparable bonds' interest and cash interest earned in Israel is similarly higher than in other countries.

Intrabank lending interest rate comparison, OECD.StatExtracts

Listing reasons for the cut, the Bank of Israel said that the debt crisis in Europe is becoming more severe and is spreading to other countries, and that there is growing concern over its potentially strong impact on the global economy, and that it is already affecting the Israeli economy, an effect that is likely to intensify.

The Bank of Israel also cited the continuing slowdown in Israel's economic activity, due to falling export demand and slackening domestic demand. Inflation expectations are close to the midpoint of the 1-3% target range, and are likely to remain there over the coming year.

In addition, the Bank of Israel added, the European Central Bank (ECB) cut its interest, and the US Federal Reserve says that it will keep its near-zero interest rate through at least mid-2013. Both the Fed and ECB are continuing with their quantitative easing measures to deal with economic problems.

Many Wise Money Israel clients diversify their Israeli bond holdings among different interest models, including fixed-rate, adjustable-rate and inflation-linked bonds to mute the effect of interest rate changes on the value of their portfolio.

Source: Globes,

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