The central bank of Israel has cut its key lending rate for the first time in a year in an attempt to help the economy which is in its second year of recession.

The Bank of Israel, which last month predicted another year of recession in 2003, will reduce its key lending rate by 0.2 of a percentage point to 8.9% from 1 January.

It was exactly one year ago that the bank made a controversial 2 percentage point rate cut that was blamed for a sharp fall in the currency, the shekel, and a spike in inflation.

Israel is in the grip of a recession brought on by the two-year-old Palestinian uprising and the global slump in the hi-tech industrial sector.

Interest factors

A number of factors are thought to have influenced the Bank of Israel's decision, including a rally by the shekel in recent months.

Last week, Israel's central bureau of statistics announced a larger than expected 0.8% fall in November's inflation.

But inflation is still expected to hit 7% by the end of the year, well above the government's target of between 2% and 3%.

In addition, the Israeli parliament, the Knesset, last week approved the 2003 budget that made big spending cuts in welfare and defence but maintained funding for Jewish settlements in the occupied Palestinian territories.

The 270bn shekel (�36bn; $60bn) budget was criticised for offering little to stimulate the stagnant economy or help lower the country's 10% unemployment rate.

Statistical spat

In November the central bank forecast a third year of recession for Israel, marking a growing disagreement with the finance ministry.

The two usually issue joint forecasts, but while the bank has predicted further economic contraction, the government has maintained a growth forecast of 1% for 2003.

The bank also expects unemployment to reach between 11.7% and 12% in 2003, from an expected 10.5% rate this year.

Private consumption, investment in fixed assets, exports and imports are all expected to decline.