WASHINGTON - "I have no intention of raising the interest rates in the near future. We will wait until the normal time at the end of the month [October]," Bank of Israel Governor David Klein told Ha'aretz over the weekend. Klein is currently in Washington attending a gathering of the International Monetary Fund (IMF).
"Our decision will be influenced by the government's success in passing the budget in the Knesset in view of the concerns over the lowering of Israel's credit rating and the downgrade that already took place in the banks' credit ratings. The recent shifts in the dollar exchange rate and the high interest rates will be considered as well," Klein continued.
Do you intend to meet with the credit rating companies in an effort to convince them that there is no need to lower Israel's sovereign credit rating?
"I have no meetings planned with the credit rating companies, and that's the way it should be. That is the role of the Finance Ministry and they are fulfilling it."
Regarding the possibility of raising the interest rates now, due to the recent changes in the dollar exchange rate, Klein said: "The exchange rate in and of itself is not important and there is nothing sacred about a rate of NIS 5 to the dollar. What is important is the rate of change. If the rate of change is rapid [in other words if rapid devaluation of the shekel occurs in a week or two], this affects the inflation rate and then it's a different story."
But there has been rapid devaluation recently, along with instability in the dollar exchange, so do you intend to intervene? Do you plan to raise the interest rates in the coming days?
"No. This is not a situation in which we especially need to intervene. There is no need to determine [our intervention] before the regular time, which is at the end of the month. Our decision will probably be taken after the new state budget's first reading in the Knesset, an important event that will influence our decision. We will see how the negotiations over the budget, which are mostly with the Labor Party, will end up. Passing the budget is an important milestone because if it passes without substantial changes, it will probably result in a lowering of yields in the bonds market."
There is a sense of insecurity, of economic chaos in Israel.
"There is no chaos. A difficult situation exists as a result of the shrinking of the economy during the last two years. But the government has a good plan for lowering the deficit in 2003, and the true test now is the government's success in pushing through its budget plan in the Knesset and then carrying it out."
How do you view the functioning of Finance Minister Silvan Shalom and Prime Minister Ariel Sharon, in economic matters?
"The situation today is much better compared to six months ago. The prime minister is committed to passing the budget without change, even if this leads to early elections. In fact, there is no disagreement on strategy today. The Finance Ministry and the Bank of Israel agree on the aims of stability on the one hand and lowering the deficit on the other, and there are no disagreements on the interest rate policy. Our central problem is high unemployment and therefore we need a macroeconomic plan that will help to create jobs, and a microeconomic plan that will encourage employment."
What kind of other factors will influence your decision on the interest rates?
"We now have an accurate picture of the economic situation, the expectations of the public, the inflation forecasts and the yields on bonds. The yields on 10-year Shahar bonds rose to 11 percent and more, and the inflation forecasts directly associated with the capital markets, that were 2.5 percent two weeks ago, are now 3.5 percent. These are bad trends."
Could we find ourselves in a crisis like that of Brazil or Argentina, which are unable to pay their debts?
"Our situation is very different from Argentina and Brazil, because our net external debt is close to zero, while that of Brazil and Argentina is large and looming. The gross external debt of Israel is about $60 billion, but we have foreign currency assets of $57 billion, which makes our net debt small: only $3 billion."
What do the assets of $57 billion consist of?
"Some $24 billion are the reserves at the Bank of Israel, and the rest are assets held by banks and non-banking bodies. If we look at the short term, we have more assets than liabilities."
However, if the public runs to purchase dollars, what will happen to the reserves?
"Who said the Bank of Israel will sell foreign currency from its reserves? It did not sell in the past and therefore any additional demand will be manifested in the rise in the dollar exchange rate. In other words, it is also possible not to sell dollars from the reserves and to hang on to them."
Meanwhile, Israeli bankers are working overtime in the U.S. capital to convince their colleagues in associate banks not to reduce the credit lines of Israeli banks or raise interest rates.
The bankers arrived in full force in an effort to minimize the damage that may follow the lowering of the credit rating of Israeli banks.
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