The Bottom Line / Look! Not at Me, Over There!

Central bank governor David Klein yesterday decided to cut the interest rate by half-a-percent, so from next Thursday the borrowing rate will stand at 5.6 percent. The governor cited low inflation expectations, less than 2 percent, and the negative inflation of the past 12 months.

Klein noted that since December 2002 he has cut interest by a cumulative 3.5 percentage points but the results are still disappointing. We are in a long and deep recession and a real interest rate of 4.5 percent is too high. In Japan's deep recession, its central bank maintains a zero rate. In the current slowdown in the U.S. and Europe, the U.S. Fed has a 1 percent rate, and the Europeans 2 percent. We may not be Japan, and certainly are not Europe or the U.S., but these differences are way too high.

However, the central factor here is not the interest rate, and neither should we blame the recession, unemployment or poverty. The number one determinant is the diplomatic-security situation that has caused investment and consumer spending to drop, and the second culprit is a combination of macro factors - excessive spending by central and local government; the heavy budget deficit that determines long-term interest rates; the whopping national debt at 105 percent of GDP which raises the risk of investing in the economy; the large, unwielding, inefficient monopolies; the welfare payments that discourage going out to work; the importing of foreign workers; and insufficient investment in education and infrastructure. Only after all these comes the interest rate.

Finance Minister Benjamin Netanyahu knows that difficult years lie ahead. He knows this year too is a lost cause, with rising unemployment and poverty, and a fall in our standard of living for the fourth year in a row. He understands that the pressures on him will only grow more intense as the economy gets worse, and it will, because the Sharon government has no intention of entering a diplomatic process that will end the conflict.

So Netanyahu has to find a scapegoat, and Klein is the one ready at hand. So the minister set up a monetary advisory council, which got government approval this week. Netanyahu knows that the council has no teeth. And clearly the composition of the council is defective - there are too many individuals with ulterior motives, too many bankers, too few independent experts.

But it has one ringing advantage - people who understand spin. The media are going to lap up the thunder that will roll out of council meetings straight into press rooms.

Council members will shower fire and brimstone on Klein and his interest rates, and Netanyahu will rub his hands in glee. It won't solve the security-diplomatic problem, nor growth, unemployment, cuts and poverty. But it will deflect the fire to monetary policy - and save his own precious neck.