Cablegate: Boi Reduces Interest by 0.2% in March

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A
SUBJECT: BOI Reduces Interest by 0.2% in March

This cable is classified Sensitive but Unclassified. Please
handle accordingly.


1. (U) On March 29, the Bank of Israel announced a 0.2
percent reduction in interest rates. This brings the Bank
of Israel interest rate to 4.1 percent and represents the
thirteenth consecutive interest rate decline since the end
of March, 2003. In the press release accompanying its
latest rate decision, the BOI indicated that its current
monetary policy would continue as long as inflation is
consistent with its inflation target of 1 - 3 percent.
Although Histadrut leader Amir Peretz criticized the cut as
too small, most commentators praised it as economically
helpful. End Summary.

--------------------------------------------- --
Surprise: Klein Cuts and Hints May Keep Cutting
--------------------------------------------- --

2. (U) Prior to the latest interest rate announcement, a
number of economists and market analysts predicted the BOI
would call a halt to its monthly rate cuts. They noted the
rate had already neared 4 percent, and claimed that during
2004 the US and Israel were likely to begin raising interest
rates. In a fairly surprising turn of events, the BOI
decided to continue cutting, if just by 0.2 percent. The
Bank, in its March 29 press release, justified the move by
noting that its interest rate policy is geared towards
bringing inflation in line with the range of price
stability, 1 - 3 percent a year. It noted that inflation
expectations were still below the lower limit of the target,
at around 1.2 percent.

--------------------------------------------- ------
BOI Boo Boo: It Missed Target in Both 2002 and 2003
--------------------------------------------- ------

3. (U) In its 2003 annual report, published March 30, the
BOI acknowledged years of criticism for having consistently
missed its inflation target in 2002 and 2003. The report
attempts to deflect this criticism, however, by referring to
numerous exogenous factors that made the target ever more
elusive: sudden changes in exchange rates, the development
in Israel of an inflationary mentality, receipt of the U.S.
Loan Guarantees, the rapid end to the War in Iraq. The BOI
notes that the policy backdrop in 2003, when the GOI
embarked on a serious program of economic reform, was
completely contrary to that in 2002, which was marked by
uncertainty, increased inflation, and a return to higher
interest rates.

Amir Peretz Kicks a Gift Horse in the Teeth?

4. (U) Commentary on the BOI cut was, for the most part,
muted. Histadrut leader Amir Peretz however, denounced it
as "too little too late," and said households continue to be
harmed by high rates. He told Haaretz in the March 30
edition that a reduction in interest should have been part
of an overall joint economic plan between the Histadrut, the
GOI and employers intended to accelerate growth and increase
the number of jobs.

5. (U) Others were significantly more positive in their
remarks. Chairman of the Economic Committee of the
Manufacturers Association, Rimon Ben Shaul, told Haaretz in
the same March 30 article that the BOI acted correctly in
continuing to reduce interest and should continue to do so
in the coming months. Shaul noted "this would help in
strengthening the recovery trend." He added that a
"necessary condition for continuing to reduce interest rates
is strictness in maintaining the budget and deficit target."

BOI: 4 Percent Deficit in 2004 "Attainable"

6. (U) The BOI noted in its press release that "assessments
of the development of fiscal policy over the year suggest
that the budget target set by the government at 4 percent of
GDP is attainable." This is a far cry from BOI's past
criticism of GOI laxness regarding fiscal responsibility,
and testament to the newfound BoI-MoF policy consensus on
fiscal issues.


© Scoop Media

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