The Bank of Israel cut its key interest rate by 0.3 percent
Monday evening bringing the nominal interest rate below 6
percent for the first time in the Bank of Israel's history.
Because inflation is low, the real interest rate remains high
at 3.5 percent. The differential between the American
interest rate (dollars) and the Israeli interest rate
(shekels) is also high at about 4.3 percent.
The new Bank of Israel David Klein interest rate is 5.8
percent. The rate has fallen 0.5 percent within two months
and has been cut by a total of 2.6 percent since January of
this year. Since the beginning of 2000 when Klein was
appointed to his post, he made 18 interest rate cuts totaling
4.9 percent.
The interest rate was made to fight the economic crisis, the
deepening recession, and the rising unemployment. The cut was
made despite the forecast of significant overruns to the 2001
and 2002 budget deficit targets. Nonetheless, inflation and
the money supply have both fallen recently.
Inflation expectations fell to 2 percent in October which is
at the lower end of the inflation target range, and to the
even lower level of 1 percent by mid-November.
In a statement to the press, Klein said that monetary policy
was intended to maintain price stability, which the
government had set as a target.
Klein said, "This stability, which contributes to the
strength of the economy, has passed very well the test of
recent developments on international markets following the
terrorist attacks in the US, and it requires adherence to
fiscal and monetary discipline."
Klein's added that it was important to immediately change the
structure of government expenditure and increase investment
in infrastructure.
The Israeli economy's risk premium fell last month, and it is
now estimated at 1.1 percent for six months and 1.75 percent
for ten years. The decline in long-term risk premium
apparently indicates some alleviation of the uncertainty over
developments in Israel and around the world, following the
increase after the terrorist attacks in the US.
Meanwhile a source in Prime Minister Ariel Sharon's office
said, "Governor of the Bank of Israel David Klein should
lower the interest rate by 0.5 percent in each of the next
six months, not by 0.2 percent, as he has been doing. The
real interest rate in Israel should be on a par with the rate
prevailing in the developed countries."
A source said Sharon planned to eliminate all political
legislation from the 2002 budget, including the Large
Families Law and the Negev Law, in view of the severe
economic crisis. The chareidi parties have threatened to vote
against the government is the Large Families Law is not
included.
