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Finance Minister Silvan Shalom showed optimism Monday night after the Central Bureau of Statistics had announced earlier in the day that the June 2002 consumer price index rose by a sharp 1.3 percent.

"The coming [inflation] indexes will be very low, if not negative, and will actually bring sanity back to the Israeli market," Shalom said, despite the somewhat rosier forecasts by analysts of a 0.7-1.0 percent increase.

Critics charge that infighting between Shalom and Bank of Israel governor David Klein is behind some of Israel's economic woes. Klein has been castigating the government for failing to slash deeply enough into its budget. Shalom counters that Klein is stifling the economy with prohibitive interest rates.

Amir Peretz, head of the Histadrut trade union, put the blame on both. "I think that we are seeing here a complete failure" of the government to cut its spending and the central bank to set a stable interest rate, Peretz said.

The CPI has risen by 6.3 percent in the first half of the year.

Food prices rose by 1.4 percent in June, rent by 2 percent, clothing prices by 4.7 percent and transportation and communication by 1.5 percent.

The June CPI does not include the government's recent raising of prices such as the increase in the cost of electricity and water.

In the first half of the year the dollar strengthened against the shekel by 15.5 percent, pushing up inflation.

It is unclear how Bank of Israel Governor David Klein will react to the unexzpected rise in the cost of living index. Klein will decide by the end of the month on whether to again raise interest rates. Analysts estimated Sunday that Klein would not raise interest rates, but in light of the sharp increase in the June CPI that may change.

Shekel strengthens against the dollarThe shekel gained further ground on the dollar Monday and was trading at NIS 4.67, a sharp 1.0 percent increase compared to the representative rate of NIS 4.728 set Friday.

Part of the dollar's weakness was attributed to its declines against the euro and a drop in local inflation rates, but dealers said a month without Palestinian suicide bombings inside Israel and promises of tight budget policies were boosting the shekel.

The Finance Ministry's proposed deep cuts to the 2003 budget aimed at keeping the deficit from rising have also contributed to the shekel's strengthening.

"There's an improved outlook on the political front," said one dealer at Bank Hapoalim. "And the overall market is still optimistic and pleased with the working relationship between the government and the Bank of Israel. Included in that are promises of fiscal discipline."