The Governor of the Bank of Israel, David Klein, agreed to a 1% cut of the interest rate as part of a package deal.
Those familiar with the man and his ways know he is not one to link the decision to cut the interest to anything beside the inflation goal.
The release of the November CPI was however the straw that broke the camel's back. It made him realize the bank would once again miss the annual inflation rate, leaving him little choice besides a bigger rate cut than he anticipated.
Gil Bufman, chief economist at Bank Leumi was hardly surprised by the planned move.
When asked whether Klein's announcement of a planned 1% interest rate cut came to him as any surprise, Bufman answered "Absolutely not. Estimates from the bank's financial department spoke of such a cut, but said Klein may implement it a little faster and in bigger chunks than expected. Tactics wise, the move is excellent for Klein. It will improve his image and give him a chance to correct past mistakes. Klein can also expect the fluctuation band to be done away with as his reward, as well as see the problem of short-term debt certificates resolved. After all, the real interest rate in Israel is 5%, as opposed to 0% in the rest of the world. This is the fourth time the bank of Israel is failing to quote the inflation goal."
Is Klein going to get the rewards he is after? ¿Yes. Though the fluctuation band may not be eliminated in one fell swoop, and the first emphasis will be put on reducing the slant. It is however clear to all, that without the conditions set by Klein, the interest can't drop at the rate he promised it would."
Who will benefit from the package deal? "The package deal looks like a great deal for everyone. Klein would in any event cut down the interest rate, now that the gap between Israel and the world has become so evident, and with the market being in such a recession. The inflation environment conditions and the exchange rate also enable the interest rate cut. His agreement to freeze pay levels at this point is also conveniently timed, as the trend in the market is to lower real wages. In this case workers can only benefit from the freeze."
Bufman's opinion on taxation of shekel accounts is that it is technically feasible, though he feels Silvan Shalom would be reluctant to be written in history as the first Finance Minister to have adopted the practice.
If you're going to tax shekel accounts, says Bufman, you might as well tax shekel bonds, short-term debt certificates and mutual funds. If you don't, the public will just keep shifting its cash from one type of account to another.