David Klein's tactics are pretty clear: lowering interest rates very slowly, without taking any risks. Thus, when interest rates reach a reasonable level, the criticism directed at him will be toned down considerably - because people tend to forget the past.
In this tactical framework, Klein yesterday cut interest rates by 0.4 percent to a level of 5.2 percent. But this is still quite high considering the state of deflation, low expectations for inflation (about 1 percent in the coming year), calm in the foreign exchange, financial and capital markets, and most importantly, the heavy recession weighing down the economy and the rise in unemployment to a level of 10.7 percent of the workforce.
Every now and then the Bank of Israel comes up with another argument for its policy of high interest. One time, it's the projections of analysts. Another time, it's various and sundry models or the size of the budget deficit. This time there was a surprise: the interest rates of central banks around the world.
The Bank of Israel says that journalists should not only quote the low interest of the Federal Reserve Bank (1 percent) and the European central bank (2 percent), but also note the key lending rates in New Zealand (5 percent), Hungary (9.5 percent) and South Africa (8.5 percent). But what do we have in common with these countries? Is our economy linked to theirs? Perhaps they are suffering from inflation there, or excess demand? And maybe they are experiencing a crisis in the banking system there? The attempt to cite high interest rates in the world - as an alibi - is ridiculous and cannot be taken seriously.
Monetary policy is formulated for a specific country and for the particular conditions of its economy. The high rate of real interest maintained by the Bank of Israel (4.5 percent) is not appropriate for the current days of deep recession and negative inflation.
The excessively high interest rates hurt all kinds of businesses - even the construction industry, which is the most leveraged sector in the economy. On Sunday, the Hiram Gat company, owned by Yeshayahu Landau and the Gat family, announced that it was discontinuing operations.
As one of the 20 largest construction companies in Israel, the company's shutdown will directly put hundreds of employees out of work and will deliver a serious blow to hundreds of suppliers and subcontractors.
While high interest is not the main reason for the crisis in the construction industry, it poses an additional burden. The principal cause is the severe recession in the industry that has already lasted for eight years (except for a short respite in the year 2000). The buyers are simply not coming and the payment ethic of those contracting for work is beneath criticism.
The Contractors' Association blames the government for the collapse because it makes it difficult to bring new foreign workers to work in construction. This is like a heroin addict who is only interested in his daily fix . The same is true for foreign workers. It's easy to get them, inexpensive to employ them and very hard to kick the habit.
But the withdrawal process is an economic and social necessity - if we wish to advance from a society that lives on welfare and unemployment benefits to one that lives on work - because there is no reason in the world for Israeli workers not to return to the construction industry.
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