A strengthening shekel and the military's offensive against militants in the Gaza Strip prompted the central bank to unexpectedly cut its benchmark interest rate on July 28 to 0.5 percent, the lowest level in five years. The monthlong conflict may cause the economy to contract between 1.5 percent to 2 percent in annualized terms in the third quarter, said Rafi Gozlan, chief economist at Israel Brokerage & Investments — IBI Ltd.
Manufacturers have called on policymakers to help exporters by cutting the base rate to zero and buying enough dollars to keep the local currency at 3.8 to the dollar. Exports tumbled 17.7 percent in the second quarter after rising 0.1 percent in the first and 26 percent in the last three months of 2013.
"With the Gaza conflict hurting an already lagging economy, it's going to be more rate cuts and more intervention to weaken the shekel," Luis Costa, the head of Europe and Mideast strategy at Citigroup Inc., said in a phone interview on Aug. 14.
The Israeli currency has risen 2 percent against the dollar in the past year, making it the eighth-best performer in a basket of 31 major currencies Bloomberg tracks.
Bank of Israel Deputy Governor Nadine Baudot-Trajtenberg said in an interview July 29 that the surprise rate cut may not be the last in the current cycle. While policy makers see no present need to cut borrowing costs further, "in principle there is still more room," Baudot-Trajtenberg said.
A report by Harel Insurance & Financial Services published Sunday, called the second-quarter economic data "disappointing," especially "given the expected influence of the offensive on third-quarter growth." Israel's statistics office said this month that tourism dropped 21 percent in July from a year earlier as a result of the fighting.