Text size


Central banks around the world slashed their interest rates this week, increasing the amount of money they inject into the economy, in order to contain the risk that the global economy is on the brink of depression. The first was the U.S. Federal Reserve which lopped 0.5 percent of the base rate on Monday, to bring the rate down to 3.0 percent, the lowest since 1994.

Next came the European Central Bank, which also cut the rate by 0.5 percent to 3.75 percent. A day later the Bank of England chopped 0.25 percent off its rate bringing it down to 4.75 percent, the lowest since 1964. Japan lopped only 0.1 percent, but then it has little room for maneuver. After the cut, Japan's rate of interest is now only 0.1 percent.

The interest rates across the Western nations are lower than in Israel, so the general mood should have brought the governor of the Bank of Israel to act accordingly next Monday, particularly with an economic slowdown of our own.

But there are factors working in the opposite direction. When the shekel depreciates, as it has done in the past month, apartment prices fixed in dollars rise, pushing inflation up too. Likewise, increasing the budget deficit makes it all the more difficult to cut the interest rate, because the government has to borrow more, and therefore needs to offer a better rate of interest to attract lenders.

Inflation forecasts have also inched up and now predict that for the next 12 months, the CPI will be greater than 3 percent. So the only thing we can say for sure is that the governor will not raise interest rates. It is harder to estimate if he will cut or leave them be.


There is something peculiar about the treasury's forecasts; they are too optimistic, because really, who wants to forecast a slowdown or depression? It is also not politically correct and no finance minister would relish the job.

In March 2001, in the throes of the intifada and the high-tech crisis, Vered Dar (then deputy of the economics department at the Finance Ministry) believed that the sharp knock we suffered in the last quarter of 2000 was a one-off, that there were signs of recovery (where?) and that 2002 would show a turnaround. In July, the treasury released a new forecast, no less rosy, that pointed to a growth of 4 percent for 2002.

Last week, the U.S. and the rest of the world lowered their forecasts for growth for the year 2002 - everyone except Israel. Because we are special. We are not influenced by the world despite the fact that exports and imports account for 75 percent of our gross output. Earlier this week, Ohad Marani, director general of the Finance Ministry, repeated that despite all, the Israeli economy will reach growth of 4 percent next year.

The truth is that without this rosy forecast, the government would have to revise downward its expectations of tax revenues by about NIS 3 billion, and then the budget for 2002 could not be met.


In other words, the system calls for optimistic forecasts that push up the expected revenues from taxes, so the government can go out and spend more. Then at the end of the year, when it becomes clear that all the forecasts were groundless and the deficit is much larger than the planned 2.4 percent of GDP, put all the blame on David Klein for not lowering the interest rate, which caused the depression and the lack of tax revenues. How lucky we are to have Klein.