The Bank of Israel reduced its key lending rate for April by
0.3 percent to 7.2 percent yesterday. Some analysts had
expected only a 0.2 percent reduction as in recent
months.
Central Bank Governor David Klein said that the decision is
in line with achieving the government's official inflation
target for the next three years, which calls for an
inflation rate of 2.5 percent to 3.5 percent this year and 2-
3 percent in 2002.
Some observers say that the rate of reduction is too slow to
meet the targets, especially in light of the recent world-
wide slowdown which requires stronger medicine. Klein has
stated that he is committed to meeting the official target
even if it requires pushing inflation upwards.
The central bank said that future decisions about further
rate cuts will be affected by the fiscal policy of the new
government. The bank added that slump in US financial
markets is expected to lead to a sharp decrease in foreign
investment, which may result in a depreciation of the shekel
and higher inflation.
The reduction was the ninth consecutive monthly cut. Since
late 1999, the central bank has lowered rates in 15 monthly
increments from 11.5 percent to the current 7.2 percent.
Observers believe that Klein will continue to lower rates to
maintain the differential in interest rates between Israel
and its main trading partners. The U.S. Federal Reserve has
reduced its rates by a total of 1.5 percent since January,
while the Bank of Israel continued with its conservative
policy of cutting rates by a moderate 0.2 percent-0.3
percent a month for a total of only 0.7 percent, thus
widening the differential from where it stood at the end of
2000. Over the previous year the differential had been
reduced from some 5 percent to about 2 percent.
Observers are divided as to whether interest rates in Israel
should be reduced more quickly or not. Some argue that the
economy needs more stimulation and that the rates are still
much too high to encourage new investment. Others argue that
stability is more important, certainly in the long run, and
too sharp a reduction may ignite inflationary fires.
