As expected, the Bank of Israel decided that its key lending rate would remain at 9.1% for another month, dashing quite a few hopes.

But do not let this "stability" mislead you. In real terms - after adjustments for inflation - interest has now risen for the fourth month in a row, and currently stands at 7.6%. And if the economic forecasters' predictions come true, and inflation is negative in August and September, the real interest rate will be much higher than 7.6%.

And we shouldn't be misled by this rate either: The Bank of Israel's lending rate is the foundation for a superstructure of interest rates, which are liable to reach double that figure, or even more, for credit consumers (businesses and households). Under existing conditions, this is a suffocating interest rate for consumers - and a bonanza for investors and savers.

Why did the Bank of Israel not fulfill the hopes for an interest rate cut? (No one expected anything dramatic. Even the most optimistic were not talking about more than two-tenths of a percentage point.)

The bank has several reasons, both old and new. In the past, it used to stress inflationary expectations for the coming year or two in order to justify its decisions to raise rates or leave them unchanged. But what can one do? Inflationary expectations, based on all the sources the bank uses, are converging on the target set by the government (1-3%).

Therefore, the bank has set this data aside, making use instead of "inflation expectations for the longer term," which, it says, are still higher than the target.

In other words, the bank is not lowering interest rates for September 2002 because the inflation forecasts for 2005 and 2006 exceed the targets for these years.

What it comes down to is that the bank does not really believe the forecasts and assessments, and has decided to wait and see what actual inflation is during the coming months.

In the past, the bank also pointed to rises in the money supply as a factor that made it more difficult for it to lower interest rates. But recently, the money supply has been falling (the bank did not even mention this fact in its press release on the interest rate).

Thus, what remains is the primary reason for the decision - "the uncertainty regarding approval of the 2003 budget and the continued uncertainty in the security situation."

The security situation could serve as a pretext for a restrictive monetary policy for a very long time to come. Regarding the budget, the government plans to submit a pared-down budget that satisfies even the most stringent demands - and though political difficulties can be expected regarding its approval, there is, nevertheless, a chance that a majority will be found for it.

But the Bank of Israel has no confidence in the government's economic policy - not even enough to enable it to reduce its key lending rate by two-tenths of apercentage point - and it is expressing this lack of confidence resoundingly, even before the international rating companies have done so.

Over and over, the fundamental flaw in the central bank's operations comes to light - an absolute preference for monetary considerations over real considerations such as activity, growth and employment.

The proposed amendment to the Bank of Israel Law is intended to make its management more pluralistic, both in terms of its composition and in terms of the definition of the bank's goals (without, God forbid, endangering its independence).

Bad timing disrupted the process, and particularly the fear that a counterattack by the bank's conservative establishment in the international arena at such a sensitive time would cause damage to the state. The prime minister and finance minister caved in without a word. Nevertheless, this amendment remains vitally necessary.

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