Steinitz to Fischer: Don't Raise the Interest Rate

Most analysts expect the Bank of Israel to increase the benchmark rate by 0.25%, from 1.75% to 2.0%.

In a meeting last week of senior treasury officials, Finance Minister Yuval Steinitz urged Stanley Fischer not to raise interest rates for October. Most analysts expect the Bank of Israel governor to announce tomorrow that he intends to do just that, increasing the benchmark rate by 0.25%, from 1.75% to 2.0%, mainly in response to the continued rise in salaries, inflation and property prices.

Steinitz said that an interest hike now will hurt exports, the primary engine of economic growth. In addition, he said, it would cause unnecessary damage to the foreign currency market by leading to an inflow of money into Israel and causing downward pressure on shekel exchange rates. That, in turn, Steinitz said, would force the central bank to resume its intervention in Israel's foreign currency trade.

The local real estate market, the finance minister said, has begun to settle down after several months of fluctuation, and putting up interest rates would trigger new bouts of fluctuation.

Interest rates are clearly in the purview of the Bank of Israel and not the Ministry of Finance, and finance ministers are not in the habit of publicly airing their views on the topic. According to the soon-to-be old Bank of Israel Law, it's the central bank governor who holds the reins of the interest rates. Fischer has raised the benchmark interest rate five times since September 2009, by 0.25% each time, to reach its present level of 1.75%.

The new Bank of Israel Law, which was approved by the Knesset about five months ago but has yet to take effect, dictates the creation of a six-member monetary council comprised of three senior central bank officials, with the governor as head and three external directors, that will assume responsibility for interest rate decisions.

In the past several months Fischer has said on a number of occasions that he is trying to bring about normal real interest rates, without ever defining what that would be. It is clear, nonetheless, that he's talking about something over 0%. Currently the real interest rate in Israel is negative.