Bank of Israel¿s interest rate hike two days ago was inevitable. Investors, lenders, dealers, manufacturers, consumers and everyone else in the foreign currency market, the capital market and the country at large, forced it on the central bank.
Ever sin ce Bank of Israel governor David Klein left Prime Minster Ariel Sharon¿s office with a decision to cut key lending rates by 2%, public faith in economic policy in general and in Bank of Israel in particular, has begun to erode.
The public told Klein: We¿re nervous, we don¿t understand the move or your justifications, and , in short, don¿t understand what happened to you.
Investors told Klein: We are buying foreign currency, opening accounts in foreign banks and acquiring index-linked financial assets not only because interest rates went down, but because of the fear of the unknown ¿ of government economic policy and its economic advisor.
The business sector told Klein: We are oddly unsure of price stability and have suddenly remembered times when there were both recession and inflation. We are not convinced this one-time price rise won¿t become a continuous upward crawl.
And Klein had no choice: He understood that there is no way to know how the erosion of public faith will end. He knows that in times of increasing uncertainty, there is no choice but to broadcast commitment to price stability to the markets in no uncertain terms. So he made a U-turn and raised interest rates by 0.6%.
Klein had a long list of reason why he had to raise interest rates. They were all well and good ¿ but most were also true two months ago when he lowered interest rates 2% after a meeting with the prime minister.