Bank of Israel: Monetary council bill could lead to lower credit rating

"The Ministry of Finance bill for the establishment of a monetary council could lead to Israel's credit rating being lowered," Bank of Israel said today in response to a bill submitted by the Ministry of Finance. According to the ministry's proposal, a monetary council would be established comprised of nine members, only three of whom would come from Bank of Israel.

Bank of Israel says that the bill is extremely negative. "This proposal annuls the state's commitment to price stability, damages Bank of Israel's independence, makes the central bank subordinate tot eh treasury, sets conflicting targets, creates a subjective decision making system and doesn¿t enable decisive interest rate policy management."

In addition, the proposal would allow the Minister of Finance to intervene in matters related to the foreign currency market and the exchange rate, which amounts to withdrawal from Israel¿s significant progress over the past decade in integration into the world economy.

Bank of Israel explains the lowering Israel's credit rating could occur due to the expected overshooting of the government deficit target, reduced 2002 growth projections, and the security situation. "A reduction in Israel's credit rating would encourage capital export from the economy and entail higher local interest rates, leading over time to erosion of financial stability," Bank of Israel stated.

According to the central bank, Israel's integration into the world economy requires stability and is a precondition for the resumption of growth and increased employment. The current stability was achieved after great effort over an entire decade. The proposal submitted to the cabinet today is a step backward and in direct conflict with the conclusion of a public committee established by the prime minister ¿ the Levin committee. The bank notes that the Levin committee, which presented its conclusions to the cabinet in December 1998, consulted foremost experts in Israel and abroad and submitted a comprehensive report.