Bank of Israel Slashes Interest Rate to 1%

The Bank of Israel on Monday reduced its interest rate by 0.75 percent to 1 percent - its lowest level ever. The reduction comes a day after the Bank of Israel said the Israeli economy had entered a recession.

The rate reduction is the sixth consecutive time that the central bank has lowered interest rates since September when the benchmark rate stood at 4.25 percent. Twice the reduction was made in mid-month, outside the scheduled announcement date.

Bank of Israel adjusted its forecast for economic growth in 2009 to a negative 0.2 percent, compared with its previous forecast of a rise of 1.5 percent. It also adjusted its forecast for unemployment, now expected to reach 7.6% in 2009.

Bank Governor Stanley Fischer said the economy will start to grow in the second half of 2009.

Last month Fischer criticized local banks for not passing the lower credit to businesses and households, though that was the goal in lowering the central interest rate.

The diamond industry in Israel is asking the banks to not pull back their financing of the industry. While banks publicly announced their continued support, they have decreased credit lines to diamond traders, demanded add securities and even raised credit rates.

In November, Israel’s Bank Leumi said it does not want to finance rough diamond purchases anymore, preferring to provide credit against sales.