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The chairman of the Histadrut, Amir Peretz MK, was quick to respond to the negative CPI figure for November: "This is a difficult day for the Israeli economy." He is wrong.

The difficult days were when, on the 15th day of every month, inflation indexes of 10 percent a month were announced. Those were the indexes in the early 1980s, the years of hyper-inflation. Therefore a negative index for November does not at all constitute a "difficult day." The fact that inflation in 2001 will end up at about 1.5 percent is no cause for weeping, but rather for celebration - especially by the weaker segments of society Peretz is supposed to represent.

Low inflation is the only safeguard that workers in the lower deciles have against the erosion of their wages. We are not referring to the employees of the Electric Corp or the Ports Authority. They have a strong labor council that makes sure their wages will outpace inflation, regardless of their salary levels.

But in the case of the tens of thousands of less powerful workers, who have no strong labor council or industry-wide salary pacts, inflation is what takes a full toll of eroding their wages. But when inflation is non-existent, these weaker workers are no longer hurt. They can buy the same items at the corner grocery month after month. Zero inflation maintains their standard of living and this is its social importance.

Employers, bankers, merchants and small businessmen are those who love high inflation. Of course, not the hyper-inflation of the 1980s, but "a little" inflation works to their benefit, because it erodes the wages of their employees and the taxes they pay to the income tax and VAT authorities. It also enables them to ease up prices without the public noticing.

True, there are some who contend that a negative CPI indicates a deep recession - but this isn't exactly correct. What is important is the annual inflation rate and it is not negative, just low (1.5 percent). Moreover, low inflation is not synonymous with recession. It is possible to have low inflation together with nice economic growth and falling unemployment. In fact, low inflation is a condition for rapid and healthy growth over time. Take 2000, for example - inflation was zero, while growth was 6 percent. Or look at the United States and Britain throughout the 1990s. Both countries had zero inflation, rapid growth and declining unemployment - year after year - and this is the real challenge.

So what is David Klein expected to do about interest rates?

The Bank of Israel has missed its inflation targets for three years. The first miss was during the term of Jacob Frenkel, when 1999 ended with inflation of 1.3 percent versus the planned 4 percent. But the public was patient then, regarding it as an isolated phenomenon.

But when David Klein took over the reins of monetary policy when he replaced Frenkel as the governor of the bank, this phenomenon repeated itself. According the plans, 2000 was to end with inflation of 3-4 percent, but there was 0 percent inflation instead. Klein admitted the mistake and even appointed a committee to study the gap. This proves that he has a sense of humor, because he was the one who set the very high rates of interest that were the main reasons for inflation dropping below the target.

In 2001, Klein said that he would make sure to increase the rate of inflation via an expansive monetary policy - that is, by lowering interest. But here we are at the end of another year, with another wide miss: 2001 will conclude with inflation of about 1.5 percent, compared to the target of 2-5-3.5 percent. Just imagine what Klein would say and his research director would write if such a gap developed between the Finance Ministry projections and reality.

The conclusion of most experts is simple and clear: the level of interest the bank has maintained during the past three years was apparently too high, the monetary constriction was too suffocating, and the economy paid a heavy price for this in deepening recession and unemployment. It seems that the governor will need to lower interest next week at a much higher rate than 0.3 percent in order to repair some of this damage.

it is unlikely that a more rapid reduction of interest would trigger a burst of inflation - not in the heavy recession we're currently in. The fact is that the inflation forecast for next year is only 1 percent, with long-term projections of 2 percent. So what is the worry?

These forecasts were made despite the uncertainty over the 2002 budget and despite the fact that the deficit this year will clearly exceed 3 percent. These forecasts are despite the government's efforts to raise a large amount of capital, which drives up long-term interest, and despite the uncertain security situation and the danger of a regional conflagration.

Despite all of this, the capital market expects inflation to remain dormant, within the target ranges set by the government (2-3 percent in 2002 and 1-3 percent for 2003). In any event, the great advantage of monetary policy is that it is set for the short-term. Therefore, even if it turns out that the governor lowers interest rates too much, he can always fix this by raising them again the following month.