Central Bank Deputy Head: Dollar Plunge Was Unexpected

"The Bank of Israel did not predict the recent four months of the weakening dollar, just as it missed the inflation target. There is no doubt that we at the Bank of Israel have a problem," the bank's deputy governor, Prof. Zvi Eckstein, said in an emergency meeting held by the Manufacturers Association to discuss the falling greenback.

In the Tel Aviv meeting, Eckstein refrained from making predictions about the future of the dollar, but said that "foreign investors expect that the dollar's fall will stop." He added that "the Bank of Israel would like to maintain a low interest rate in order to return to targeted inflation rates."

Eckstein supports the providing of assistance to industries through exchange rate insurance. He also said the government should help traditional industries such as textiles and metals to modernize their technology, which would increase productivity.

Treasury Director General Yoram Ariav, who participated in the meeting, objected to providing government assistance to exporters in the form of exchange rate insurance. "We've already tried it. It means a return to the days of 400 percent inflation, high interest rates, low growth rates and a very high level of government involvement in the business sector. I don't think you want to go there," he said. Referring to the falling dollar, Ariav said that "the Israeli economy has made a correct strategic decision to integrate into globalization, and as a result we can do only so much. We cannot address the international fluctuation of dollar rates."

Manufacturers Association President Shraga Brosh warned that "a lack of government action in the face of the falling dollar will result in 35,000 workers being forced out of work or not being hired. If the governor of the Bank of Israel reduces interest rates by only 0.5 percent, we will miss the inflation target."

Brosh called on the central bank to reduce interest rates at the end of 2007 to 2 percent from the current 3.75 percent, which will enable the dollar to reach 4.1 shekels from the present rate below 4 shekels. "Inflation of 1.5 to 2 percent, which is slightly higher than current levels, is certainly suited to the Israeli economy," he added.

Ohad Marani, chair of the Manufacturers Association economics committee and former treasury director general, warned an overly strong shekel is not healthy for the economy. He called on the government to address the situation by reducing interest rates, taxes and port tariffs. He expressed concern that shocks to the economy could trigger layoffs and a loss of exports.

The Motorola CEO in Israel, Elisha Yanai, said "the economy is ill." He called on the government to "follow the example of dozens of countries in the world who have brutally intervened to protect their currency against the dollar."