On Monday Bank of Israel governor David Klein raised key
lending rates 1 percent, to 5.6 percent. This brings rates
almost back to the point at which they were last December
(5.8 percent) when they were slashed by 2 percent. Klein
warned that the central bank could continue to increase rates
further if inflation does not moderate.
The interest rate increase is partially aimed at halting the
shekel's slide against the dollar and stabilizing consumer
prices. The shekel fell from about 4.2 to the dollar six
months ago to over 4.9 to the dollar now. Higher interest
rates make it more attractive to hold shekels, holding up the
value of the shekel. Most economists think that the shekel
"should" be at about 4.6 to the dollar.
The bank raised the benchmark in February for the first time
in three years and then again last month. The raise is the
central bank's largest since November 1998.
Some had expected Klein to announce a rise of as much as 1.5
percent after the Central Bureau of Statistics released
April's larger-than-expected CPI increase of 1.5 percent,
which brought the year's inflation thus far to 5 percent.
Klein said the measures were needed to meet the bank's upper
target of 3 percent inflation for 2002.
Klein blamed the growing inflation on the government's
"laxness in fiscal policy," saying its delay in pushing its
NIS 13 billion economic plan through the Knesset, along with
the security situation, had undermined the stability of
financial markets. He said the interest rate hike is
essential to restoring price stability and bolstering the
shekel's strength.
Klein noted that the government had upped the permitted
budget deficit four times, the latest to 3.9 percent of GDP,
as part of the Emergency Economic Plan currently going
through the Knesset.
The treasury condemned the rate rise. Ohad Marani, treasury
director general, dismissed Klein's policy over recent years
as "a zigzag" and said "we would prefer to see a correct
policy."
The Tel Aviv Stock Exchange was virtually unmoved by the
announcement, as the anticipated news had apparently already
been factored into share prices. The TA-25 Index rose 0.4
percent to 387.81, while the TA-100 closed 0.1 percent higher
at 377.1.
Klein has been at odds with the government since he cut rates
2 percent in December to 3.8 percent as part of a deal with
Prime Minister Ariel Sharon to control the state budget by
exercising more fiscal discipline. Klein's expectations for
budget cuts have been disappointed since then, including the
government's failure, until recently, to push its NIS 13
billion economic plan through the Knesset. The bill is now
awaiting its second and third readings, which could begin
early next week.
Klein said the December interest rate reduction, which is
seen as the central factor leading to the shekel's 15 percent
devaluation from NIS 4.23 to the dollar to its current NIS
4.89, was part of the bank's plan to reduce long-term
interest rates, stimulate economic growth, and enable price
stability at lower interest rates.
Most observers agree that the primary problem is ensuring
stability now. There are few prospects for growth as long as
the security difficulties continue and also the rest of the
world is mired in a prolonged recession that shows no clear
signs of ending.
