'Lowering Interest Rates Now Would Be a Mistake'

Fischer stands up to the pressure.

"Reducing interest rates now will increase the inflationary pressures on the economy, which are high already," Stanley Fischer, the governor of the Bank of Israel told a press conference yesterday.

Fischer called the last-minute press conference in response to a report published yesterday in TheMarker that the Manufacturers Association and the Histadrut labor federation were planning to force him to lower rates by making changes in the Bank of Israel Law.

Fischer warned that lowering rates now would be a mistake: "The result of a lowering of interest rates wold be that in a few months we will need to raise them again."

He explained that this had happened three times in the past, at the end of 2001 when then governor David Klein lowered rates by 2% and later had to raise them by 4%.

"One can make a mistake once, but it is not worth repeating it. We need to follow a consistent policy," explained Fischer. The economy is in excellent shape, he said, and will still be excellent even if economic growth this year meets the central bank's most pessimistic forecast of 3.6%. (The optimistic forecast is 4.4%)

"We still do not see signs of an economic slowdown, or signs that would lead to a reduction in inflationary pressures," said Fischer. We have to accept the fact that the shekel is a strong currency, and this situation will continue for a long time, he added.

The central bank, treasury and Prime Ministers Office are finishing drafting the preliminary version of the new Bank of Israel Law, said Fischer, noting that the new law meets international standards. As to the proposal of Histadrut chairman Ofer Eini and Manufacturers Association president Shraga Brosh to change the law, Fischer said: "It is is not worth proposing a new law whose sole purpose is to lower interest rates by half a percent because of a specific problem.

"Laws are made for 50 years. A law is a very serious thing. If we do not understand the importance of the central bank, and what happened in the economy during the years 1980 to 1985, then we have learned nothing. A central bank is the main institution for economic stability and thereby [creating] economic growth. The bank's policy is intended to bring inflation to its target range, so there will be growth," said Fischer. He said it was not worth starting with populist games.

As to whether the bank would intervene in foreign currency markets to help exporters: "The central bank never says never. The Bank of Israel has reserves to deal with disturbances in the market or market failures; or with a situation where the markets are not functioning efficiently. That is something exceptional. If we intervene now, we will influence [markets] for maybe a week or two, but we will lose the trust we have earned over the years," he insisted.