The Bank of Israel has lowered key lending rates for February by 0.3% to a nominal rate of 7.7%, it announced Monday afternoon. Meanwhile, however, it isn't business as usual at the central bank, where disgruntled employees are blocking the release of the usual year-end reports for 2000.
The central bank said its decision is based on assessments that inflation will range from 1% to 2.5% in 2001, and that it will be below the target set by government in 2002 too.
The central bank further stated that its moves to lower inflation in small increments have ensured stable prices even during the turmoil of recent months.
The reduction in February rates will be the central bank's seventh interest rate cut since August 2000.
Economic circles believe the United States Federal Reserve Board will shortly be announcing another interest rate cut, of 0.25% to 0.5%, in order to halt the slowdown in the American economy.
Local economic indicators supporting an lending rate cut include the gradual increase in the money supply and assessments of negative inflation in the months to come.
"That's not how to structure moves to extract the economy from a slowdown and restore growth," commented Chambers of Commerce managing director Joseph Shostak. He said that today the slowdown is worsening, unemployment is rising, investments are dropping and growth has ground to a halt. Instead of halting the erosion and taking steps to encourage economic activity, the governor of the Bank of Israel is sticking to his conservative policy, Shostak said, which barely affect the economy.
"The governor of the Bank of Israel should folllow the example of Federal Reserve chairman Alan Greenspan, who hastened to greet the mere signs of an incipient slowdown in the American economy with a 0.5% interest rate cut," Shostak advised. He said that an equivalent move would be to lower domestic interest by a full one percent.
Rebellion at the bank
For the first time in its 46 years, the Bank of Israel will not be publishing its three chief annual reports. The unprecedented rebellion was sparked by the refusal of the bank's chiefs to accept a new format for the bank's annual report, decided upon by Bank of Israel Governor David Klein.
The main report being blocked is the bank's annual comprehensive review of the Israeli economy, compiled by the research department and published under Article 59 of the Bank of Israel-1954 law. The other two reports are a review of the currency market and the monetary department's survey of events on the finance and capital markets.
The uproar actually began a year ago, but it only surfaced recently. Last year Governor David Klein shocked the bank by refusing to write the preface to the research department's annual report for 1999, and refused to sign it. He also canceled the traditional press conference, featuring all the bank's top executive, at which the annual report is presented. Last year, Klein's moves were interpreted as part of a power struggle with research department chief Leo Leidermann. Prof. Leidermann has since left the bank.
In August the governor decided to cancel the publication of the research department's annual report altogether. He decided to replace it with a comprehensive report on all the bank's departments. The governor decided that the report would consist of four sections, each compiled by a different department. The research department, previously responsible for the whole enchilada, was left with the first chapter only, which would cover three areas: the situation of the economy, the budget, and the jobs market.
The monetary department, said the governor, would be responsible for compiling the second section, analyzing developments in the economy, in the capital market and in inflation. It would also explain the bank's monetary policy.
The third chapter, the governor stated, would be written by the bank's Supervisor of Foreign Currency, on the forex market and Israel's balance of payments. The fourth chapter was to be the province of the bank's auditor. It was to include the bank's annual balance.
The entire bank was incensed, particularly the research department. But the other departments would just as soon leave the responsibility for the annual report to the research department, while they issue their own reports.
In 1999, the general report compiled by the research department comprised 392 pages. The monetary department's report comprised 144 pages and that of the supervisory department, 170 pages. The new format was, among other things, supposed to trim down the paperwork by dozens of pages.
The governor states that it would be better for each chapter to be compiled by the relevant experts. He said the existing format entailed a great deal of overlap and waste.
When Klein sought to see how the research department was progressing with the annual report, he found that in fact, it was not. The research department people were uncomfortable with the new format and were barely budging. Bank executives say that emotions are riding high and that the senior economists cannot be forced to write.