Cablegate: Israeli Economic News: Klein Puts Cuts On Hold;

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: Israeli Economic News: Klein Puts Cuts on Hold;
Cabinet Oks Netanyahu Tax Reductions; BOI Upgrades Growth

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


1. (U) On Sunday, April 25, the Bank of Israel announced
that there would be no change in interest rates in May,
leaving the BOI rate unchanged at 4.1 percent. On the same
day, the GOI approved Finance Minister Netanyahu's plan for
reducing taxes announced earlier in the month. The cuts
include reductions in income taxes as well as a gradual
reduction in corporate taxes from 36 percent to 30 percent
by 2007. Meanwhile, the BOI Research Department Chief,
Karnit Flug, says Israeli growth will reach 3.4% in 2004.
End Summary.

Pause in Interest Rate Cuts

2. (U) After 13 consecutive monthly interest rate declines,
the Bank of Israel announced on April 25 that interest rates
will remain unchanged at 4.1 percent. In a very carefully
crafted press release, the Central Bank listed a number of
reasons for not continuing its program of interest rate

- the shekel has experienced a 4 percent cumulative
depreciation since the beginning of 2004;

- the money supply has increased 8 percent in the first four
months of this year, directly related to the decrease in
interest rates;

- Government bonds yields have slowly begun to rise.

The BOI also stressed its adherence to price stability as a
chief aim, and stated that, as there is now an increase in
inflation expectations, it will review its monthly interest-
rate policy in order to maintain price stability within the
government's 1 - 3 percent framework.

BOI May Cut Further If...

3. (U) The BOI in its press statement indicated that if
inflation remains in the price stability range and the
financial markets remain calm there could be a continuation
of interest rate cuts dependent on certain conditions. This
would depend on whether there would be an increase in
capital inflows relative to outflows, thus strengthening the

4. (SBU) In a veiled slap at the Ministry of Finance, the
Bank noted that more attention needed to be paid to reducing
Israel's high debt burden, which reached 105 percent in
2003. As the BOI press release explained, reducing the debt
burden would reduce long-term rates, which would in turn
allow for short-term rates to be lowered.

Government Goes for Bibi's Tax Cuts

5. (U) On Sunday, April 25, the Cabinet approved Finance
Minister Netanyahu's proposed tax reductions for low and
middle-income earners, as well as a gradual reduction in
corporate taxes from 36 percent to 30 percent. Draft
legislation will be presented to the Minister's Committee
for legislation next week. These changes will require
Knesset approval, and if all goes according to schedule,
would go into effect on July 1. Finance Minister Netanyahu
announced the proposed tax cuts originally on April 4, 2004
on the eve of the Passover holiday. The MOF stated in its
press release that the reductions were intended to reduce
income distribution gaps, encourage employment and
investment, and assist acceleration of growth.

BOI optimistic about 2004 economic prospects

6. (U) On April 22, Karnit Flug, Head of the Research
Department of the Bank of Israel, expressed newfound
optimism in a news conference about the Israeli economy,
with forecasts exceeding those of the Ministry of Finance.
Flug attributed the turnaround to the global recovery, to an
improvement in the security situation, and to the GOI's
fiscal and monetary policy.

7. (U) Flug presented the updated BOI 2004 forecasts as

Updated Previous
GDP 3.4 2.4
Business GDP 5.2 3.7
Private Consumpt. 4.0 2.8
Public consumpt. -2.5 -2.5
Exports 7.8 5.5
Civilian imports 8.4 6.7
Investment in fixed 3.5 2.0


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