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Bank of Israel Governor David Klein is unsure about the central bank's future monetary policy. "It is still not clear what will happen in the next year," Klein told Haaretz.

In his first reference to capital market analyses suggesting that the time has come to halt previous sharp interest rate cuts - from 9.1 percent in December 2002 to its current low of 4.1 percent - Klein said there is a need to wait before making a decision.

"The market is waiting for more information," he said. "It is still not telling us to raise the interest rate, but it does show signs of a break in the policy of lowering the short and long-term interest rates. The question of whether interest cutting is to continue or to stabilize - that is still open."

Recently, the money market interest rate, reflected in the prices of short-term Bank of Israel bonds (one-year Makam notes), has been creeping upward, opening a wider gap between that rate and the central bank's prime lending rate. Current Makam yields are around 4.5-4.6 percent, about half a percentage point higher than the central bank's rate. In this way, the market indicates that it believes Klein will stop cutting the rate - a step he has consistently employed since March 2003 - and may even start raising the rate. Yields on long-term bonds, such as the Shahar notes, have risen to 7.5 percent.

Has the market indicated that you should stop cutting interest?

"Not yet, but it does tell us something that it didn't say before. The markets preempt; they smell the question marks; they see the government budget policies.

"For a year, the markets have told us that everything is okay; the cut in interest rates is expected and logical and will stay firm. In the past three months, there have been question marks - how long can this process continue? The gap between short-term and long-term interest is growing; the fall in long-term interest has halted and even changed direction - and there is a need for time out."

Sticking to his guns

Klein has consistently stated his beliefs in dealing with the main problems that he sees in the financial markets; the vast pension fund deficit, the banks' total control and conflicts of interest; the market's laxity and lack of developing competition in the bank credit sector. At every opportunity, the governor has called for the pension funds to be let loose on the capital markets and to restrict their control by the banks.

What do you think of reforms in the capital market?

"For a long time, nothing was done, and it is important to encourage reforms that are required to encourage economic growth. I attach grave importance to the treasury's readiness today for [the reforms], to think together, and to prepare for changes in the capital market."

What exactly do you mean?

"There have been consultations between the sides about the necessary framework for the financial markets. It is not a forgone conclusion. One has to begin asking questions about what is wanted."

Begin asking questions? For 10 years already you have lectured on every dias about what has to be done!

"True, we have laid out these things many times, but now there are new people in the treasury asking questions, and we have to go over it with them and cover the basic ideas. It is quite acceptable to spend some days on this"

"Some days" or do you mean this is just another prevarication?

"No, the important decision was made not to set up another committee on capital market reforms."

Look behind you

Victor Medina's departure from heading the United Mizrahi Bank was seen by many as proof that he was being groomed for Klein's post, and that a deal even had been struck with the prime minister. Klein, however, who has spent five years establishing good relations with both the prime minister and the finance minister, has not shown signs of someone about to leave his post. On the contrary, he may even consider submitting his candidacy for another term.

Do you believe that the bank, and yourself as its head, have lost prestige and power? Maybe even the attacks on the Supervisor of the Banks has contributed to that?

"About prestige - I don't know. Each has his own measure of prestige. As for power - quite the opposite is true. A central bank can operate correctly only when economic conditions permit. These conditions were created in the past year, with the government's economic policy. What we did with the interest rate this year was not previously possible, and that's all due to the economic policies. The moment a government takes responsibility for the economy, it also allows the Bank of Israel to do its job. Fact: the interest rate has stopped being the issue."

And the monetary advisory council [established by the present government to advise the governor over interest rate policy] is also no longer the issue?

"On the council, only two out of the 12 talk about interest rates, and even they talk only about principles... It only strengthens the bank, not weakens it.

And are there problems over wages at the bank?

"I think there ought to be changes in wage management at the bank, and some of that I have managed to achieve over the past four years. The main problem is that there are many highly-paid workers at the bank. I have no problem with workers earning good salaries, but I do have a problem with the number of workers who do. This is the issue that has to be addressed, and I have done so, during which [the workers] took sanctions, and I received no support whatsoever from the outside."

Do you not fear that the Sharon affair [concerning possible legal actions against the prime minister] affects economic stability in the event that we lose the finance minister?

"In the past year, we have had a good political infrastructure for economic policy. We know that without this structure, a stable economic policy cannot be conducted, and therefore, it is important to preserve this. There are several components of this political infrastructure - a finance minister who can lead a government to support him, and a Knesset that backs him. These conditions have existed since 2003."

But what about the issue of whether the finance minister gets replaced?

"I wasn't talking about a particular minister, but about a supportive political structure."

Maybe you could take this festive opportunity and announce your next candidacy for the job?

"I have an objective problem answering that. There is a gap between what I want and what can be, and this gap can change in the next nine months in a way I cannot predict.

Nine months? But you analyze the capital markets 10 years down the line!

"Ten years can often be easier to forecast than nine months."