The Finance Ministry continues to be critical, this time of Bank of Israel's monetary policy.

Yesterday the ministry published a report on public sector wages and used it as an opportunity to slam the bank. In a new economic report for 2002 issued today, the ministry devotes a special chapter to the central bank, examining purported damage stemming from the bank's past monetary policy.

The ministry writes that the bank has in recent years adopted restrictive monetary policy and persistently fallen short of inflation rate forecasts. This policy has markedly hurt the ability of the economy to realize its growth potential, the economists write.

They estimate that devaluation in the shekel following the sharp interest rate cut of 2% in December will not lead to rapid inflation. Nominal devaluation now is not expected to lead to significant rise in prices, the economists write. They add that nominal devaluation is certainly unlikely to create an inflationary process, while they expect it to lead to prolonged real devaluation that will assist the economy.

The economists write that a drop in real interest rates, and real devaluation will help many economic sectors, mainly traditional sectors, plants and small businesses, which usually finance their activities through shekel credit. The economists believe that a drop in real interest rates and real devaluation will also assist weaker households, whose overdrafts usually exceed their shekel deposits. The economists write that a drop in real interest rates and real devaluation will boost exports and investments, and to a lesser degree boost private consumption.

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