By Albert Robinson
The Bank of Israel will raise its key interest rate by up to 1.5% to restore its credibility in monetary policy and halt a slide in the shekel, economists forecast on Thursday.
Most predictions until now have been for a 1% rate hike, to be announced next week. The bank will announce its monetary program for May on Monday. Last month, it raised the key rate by 0.2% to 4.6%. The fall in the shekel's value has sparked inflation since the key rate was slashed by 2% last December. "I don't think there's any doubt (central bank governor David) Klein regrets his cut last December and wants to restore his credibility," said Jonathan Katz, macroeconomic strategist at Ofek Securities. "This will be a dramatic rate rise that will be higher than market expectations of 0.8-1.0 percentage point." Consumer prices have risen sharply in the first four months of this year - up a cumulative 3.9%, with a 1.5% jump in April alone - following the shekel's more than 10% plunge against the dollar after the rate cut.
The government's inflation target for 2002 is 2-3%. Yacov Sheinin, head of the Economic Models consultancy, believes Klein will have no choice but to raise the key rate by 2.0% in the next two months, with a 1.5 point rise on Monday. "Small rises don't solve anything," Sheinin said. "Israel is in a semi-war. The CPI will rise 1.0% in May and there's a lot of uncertainty so a strong rise is needed. "He (Klein) needs to stabilize the exchange rate. If the shekel falls to 4.65 we will see negative indices in the second half of the year. That could lead to inflation this year of 5.5% and not 8.0%." Recession won't prevent rate rise
Ptachia Bar-Shavit, chief economist at Bank Hapoalim, forecasting a rise of 1.0percentage point, said restoring price stability was currently more important to Klein than depressing the economy further.
"Price stability has deteriorated in the last few months so a cut will have to come at the expense of pushing growth back. This issue can wait a while." Katz agreed, saying a sharp rate rise is inevitable despite Israel's deep recession. "He's more worried about the shekel which keeps weakening, fiscal policy and wage demands than the recession. "He feels he was misled over cutting the key rate last December and what was promised was not delivered. He wants a tougher fiscal policy and strong budget cuts. He is not impressed by the government's economic plan." Parliament approved an NIS 13 billion emergency economic plan in an initial vote on Wednesday. The plan includes six billion shekels of cuts, three billion shekels in tax rises and increasing the budget deficit to 3.9% of gross domestic product from 3.0%. The plan aims to rein in a swelling budget deficit, partly boosted by a rise in defense spending to deal with the 20-month-old Palestinian uprising.