Unprecedented

The Bank of Israel surprised again – for the 2nd consecutive month – and lowered interest early in November (on 11 November, to be precise), prior to the official interest rate policy announcement this month, scheduled for 24 November. As with the early October reduction, this latest one was of the order of magnitude of 0.5% (following the early October reduction, interest was again lowered – by 0.25% - at the end of October). What makes this particular reduction special is that it brings central bank interest in Israel to the unprecedented low level of 3%.

Will the current level of interest remain unprecedented? Probably not – there are strong rumors that interest will continue to be reduced, an expectation not fundamentally different from expectations regarding interest rates in other developed economies. Most major central banks have lowered interest rates in October-November (with the star role given to the Bank of England, which lowered interest in early November by a gigantic 1.5%) and these reductions are expected to continue.

Governor Stanley Fischer of the Bank of Israel is clearly worried – as are other central bank governors within their own economies – about the possibility that the Israeli economy will slip into a recession, brought on by the developing global recession and the credit crunch, which is firming up in Israel as well.

Every new piece of data recently published in Israel points clearly to the developing slowdown: two indicators published by the Bank of Israel itself show this – the State-of-the-Economy index, an indicator of overall economic activity, which has been trending down now for the past 4 months (through September) and the central bank's Company Survey for the 3rd quarter of 2008, with companies in all sectors reporting a slowdown of activity in this quarter (contractions of activity were reported by companies in industry, commerce and construction) and providing even more pessimistic forecasts of activity for the 4th quarter of the year.

Consumer confidence is also beginning to reflect the current situation, with a sharp fall in October in Hapoalim Bank's Consumer Confidence Index.

Data expected later this month are GDP estimates for the 3rd quarter and the Labor Force Survey – the broadest dataset on labor market developments. Questions waiting to be answered here are: 1. Will GDP growth slow significantly in Q3 (annualized growth was still high at 4.2% in the 2nd quarter of 2008, though lower than the 5.6% growth of Q1/2008)?; 2. Will the unemployment rate show an increase: up to now (the latest data on unemployment are for August), there have been no signs of increase in unemployment, but at the same time, the economic press is full of reports of companies firing workers, particularly – but not only – in the hi-tech sector.

The answers to these questions will surely influence Governor Fischer as he prepares for his upcoming interest rate decision on 24 November, when a new precedent may indeed be set in

the area of interest rates in Israel.