Only Small Gains for Shekel, Despite NIS 2 Bn Budget Cut

The shekel strengthened a mere 0.12 percent against the U.S. dollar according to the representative trade rate on Friday, despite Thursday night despite Thursday night's meeting between Prime Minister Ariel Sharon, Bank of Israel Governor David Klein and Finance Minister Silvan Shalom, during which it was decided to cut an additional NIS 2 billion from the budget.

The new representative rate has $1 trading at NIS 4.954 - compared to NIS 4.96 on Thursday.

The government will also put forward legislation to block private members' bills that require funding beyond what is available in the state budget - and will consider a new policy for child allotments, requiring income tests for eligibility for the handouts.

At a meeting in Sharon's Tel Aviv office Thursday night, meant to send a message to the financial markets that the economic leadership intends to stabilize the economy, the prime minister reprimanded Shalom and Klein for their verbal dueling - and behind closed doors singled out Klein for publicly criticizing the government's recent legislation to cut NIS 13 billion.

The decisions made Thursday were meant to demonstrate that the government is in control of its budget and trying to avoid a large deficit. The three men hoped that Friday's markets will show much less volatility regarding the dollar-shekel exchange rate. Sharon and Shalom are hoping that Klein won't raise interest rates at the end of the month, and Klein reiterated it will depend on inflationary expectations.

But Klein has already lowered interest rates dramatically once before on the basis of a promise the government would cut spending, and if there is no budget cut by the end of the month, he may move ahead with another interest rate hike to follow the surprising 1.5 percent hike earlier this week.

Pushed up by rampant dollar, consumer prices climb 0.9%The Consumer Price Index (CPI) rose 0.9 percent during the month of May, in line with market expectations. Since the start of the year, the CPI has risen by 4.9 percent, and the annual rate of inflation now stands on 8 percent -exactly where it was two months ago.

Around half of last month's increase was due to the steep rise in the rate of the dollar, which climbed by almost 2 percent during May. This increase was chiefly manifested in the housing sector of the CPI, since the devaluation of the shekel led to a steep rise in apartment rental prices. Other sectors that showed rises in May were cigarettes, which became more expensive as a result of tax increases, and electricity, the price of which rose because of a rise in the cost of gasoline, which is priced in dollars. There were also price rises in the clothing, transport and communications sectors.

The Retail Price Index recorded a steeper increase in May, climbing by 1.3 percent. The rise in retail prices means that the CPI is likely to follow suit in the coming months.