Analysis |

The Bank of Israel Just Voted Against Bibi

The timing of the Israeli central bank's first rate hike in seven years is strange and there's no clear economic case for it: The bank seems to have been sending a political message

David Rosenberg
David Rosenberg
PM Benjamin Netanyahu
There's no economic reason to hike the interest the central bank's bizarrely timed rate increase looks like a vote. Credit: Kobi Gideon, Government Press Office
David Rosenberg
David Rosenberg

It may be true that all the world’s a stage, but the Bank of Israel rarely gets more than a bit part in the drama.

Its governor Stanley Fischer played a heroic role in the 2008 financial crisis when the government was paralyzed by elections, and he made a little history a year later when Israel became the first country to raise its interest rate in the wake of the crisis.

But since then, the Bank of Israel has been a bore. Since 2015 the base rate has been at a record low 0.1% and its monetary committee has had so little to do that it stopped meeting every month. How often can you sit around a table of coffee and bottled water and decide not do anything?

On Monday, however, the Bank of Israel gave us some unexpected drama, not only in the arcane realm of monetary policy but even in politics. Against nearly all expectations, the committee voted to raise the base lending rate to 0.25%.

It isn't the economy, stupid

In and of itself, that sounds undramatic. It may have been the first rate change in close to four years, but it is hardly spells a major change in policy. Its immediate economic impact will be infinitesimal.

If interest rates were just about economics, then there would be little to say. But the message that the bank sent in its decision contains some unpleasant news for politicians like Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon, who will be facing the voters sometime between now and next November.

Politicians don’t like high interest rates or even rising ones. They spell slower economic growth, and higher borrowing costs for consumers and business. Even if rate hikes are the right prescription for the economy in the long run, long-run thinking isn’t exactly what elected officials engage in, especially if they are running for re-election.

Take Donald Trump, a man who understands very little but does know something about interest rates: He has repeatedly attacked the Fed for raising them. Trump is keenly aware that it could slow the economy just about when he is gearing up for re-election in 2020.

The Israeli economic miracle of the Bibi years – uninterrupted growth, record low unemployment and a consumer boom – has contributed in no small way to the prime minister’s popularity. But the economy is slowing and the risks of a recession are growing, and now the Bank of Israel is adding to the danger by starting to raise the cost of money.

Slapping the kids

It would be nothing more than idle speculation to guess who on the monetary committee voted for (and, assuming it wasn’t unanimous, against) the rate hike, but it is certainly fun.

Note that the Bank of Israel is between permanent governors (Karnit Flug left earlier this month and her successor Amir Yaron isn’t due to arrive until December 24). It really is odd that the committee chose this time to leap into action.

Certainly there was no urgency to act as there was, say, in 2008. The economic case for the hike, as laid out by Acting Governor Nadine Baudot-Trajtenberg, is hardly convincing. Inflation has been rising, but oil prices have collapsed and that will feed into lower prices in Israel. The Israeli economy is still growing, but the pace is trending lower. A rate hike will undermine the bank’s policy of preventing a too-strong shekel.

Rather, there’s a discreet political message in the hike, which is: Israel’s economy looks good now, but it’s being badly managed, as Flug had said many times during her term as governor. The government is spending too much and resists raising taxes. With elections on the horizon, Netanyahu’s government won’t change its bad behavior. We at the Bank of Israel are the responsible adults, and you at the Finance Ministry and Prime Minister’s Office are not.

Of course, the incoming governor Yaron could leave rates unchanged during the critical election period, and indeed that is the conventional wisdom. Chosen and carefully vetted by Netanyahu and Kahlon, it’s quite possible that they checked if he was on the same page as them on economic policy, or whether he would oppose them, as Flug did during her term.

If so, by acting now, the Bank of Israel sent a message before the new governor has a chance to send his own.

The monetary committee may even have given Yaron the room he needs to keep raising rates (if indeed that is how he feels) because he no longer carries the onus of the person who started the policy – he'd just be acting on his inheritance.

A day after the rate hike announcement neither Netanyahu nor Kahlon have commented on the rate hike, much less issued any kind of Trumpian denunciation. Perhaps they accept the conventional view that there won’t be follow-up increases in the immediate future.

It’s even possible they are simply acting responsibly by not publicly commenting on a decision made by an independent authority as the Bank of Israel is. No matter, we still don’t have a date for the next elections, but it looks like the Bank of Israel has already voted and cast a ballot against the prime minister.



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