The Bottom Line / The burden of responsibility
David Klein had no alternative this time. He had to raise the key interest rate to restore stability, and because of the rise in long-term interest. If Klein had not set the interest rate higher yesterday, this would have required more money to be printed on a daily basis - namely a return to inflation.
David Klein had no alternative this time. He had to raise the key interest rate to restore stability, and because of the rise in long-term interest. If Klein had not set the interest rate higher yesterday, this would have required more money to be printed on a daily basis - namely a return to inflation, and the governor is obliged to stop this. The only problem is in the force of this measure.
An analysis of the past indicates that the shekel depreciated about 9 percent against the dollar in 2001, while prices rose by 1.4 percent. Since the beginning of 2002, a depreciation of 11 percent has happened, while prices have risen by about 5 percent. For a country in which imports comprise about 50 percent of the gross domestic product, these are not dramatic figures that demand severe steps.
In any case, raising interest rates cannot prevent currency depreciation. The interest rate does have an effect on the exchange rate, but it is not the decisive factor. Hiking the shekel interest rate does work to dampen demand for dollars as a financial investment, but the reason for the latest depreciations are the large budget deficit, problems in exports and tourism, and the political-security situation.
If we look toward the future, the inflation projections for the next 12 months are only a bit above the 3 percent target - and this is also not very dramatic. There is also a chance now that government spending will be cut, public sector wages frozen, social allowances decreased, taxes raised, and the budget deficit kept to 4 percent.
The governor said yesterday that the government is demonstrating a lax budgetary policy and that the security situation is deteriorating, and that this has undermined the stability of financial markets in recent months, creating real concern about continued depreciation and inflation. All of this was perfectly true a week ago. But, nonetheless, Shas ministers were fired several days ago, and the prime minister and finance minister show signs that they are serious about decreasing the deficit by NIS 13 billion. Therefore, if the emergency package is approved by the Knesset in its current form, this will herald a fiscal cutback during the next year and a half. In this situation, we do not need to be so tough in monetary policy. This means that an interest rate hike of less than 1 percent would have sufficed.
There is one big condition in this whole scenario - keeping Shas in the opposition until the emergency plan passes the Knesset unscathed. Toward this end, the Knesset yesterday established a special committee - circumventing Finance Committee chairman Ya'akov Litzman MK (United Torah Judaism).
There is a clear majority for the plan in both the committee and Knesset with the votes of Likud, Labor, Yisrael B'Aliyah, Center Party, Shinui and National Religious Party. So now all of the responsibility is placed upon the shoulders of Weizman Shiri (who will be chosen to chair the special committee).
He has the opportunity to demonstrate leadership, to pass the emergency plan quickly, within two days, as the emergency situation demands. And perhaps to win the trust of the public and his fellow MKs, none other than Weizman Shiri will be the one to give up the Negev Law.
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