David Klein had no alternative this time. The Bank of Israel governor had to raise the key lending rate in order to restore stability, and because of the rise in long-term interest. If he hadn't, the treasury would have had to print more money on a daily basis ¿ read: inflation would have returned. It is his job not to let that happen.
The only problem is in the force of his measure.
Analysis of the past shows that in 2001, the shekel weakened 9% against the dollar, but prices rose by only 1.4%.
Since the beginning of 2002, the shekel has weakened by 11%, while prices have risen by about 5%. For a country in which imports comprise about 50% of the gross domestic product, these are not the kind of dramatic figures that demand extreme steps.
In any case, raising interest rates cannot prevent depreciation. The interest rate does affect the exchange rate, but it is not the decisive factor. Lifting interest on the shekel does dampen demand for dollars as a financial investment. But the reason for the latest depreciations are the large budget deficit, problems in exports and tourism, and the political-security situation.
If we look toward the future, the inflation projections for the next 12 months are only a bit above the 3% target - and this is also not very dramatic. There is also a chance now that government spending will be cut, public sector wages frozen, social allowances decreased, taxes raised, and the budget deficit kept to 4%.
The governor said yesterday that the government's budgetary policy is lax, that the security situation is deteriorating, and that this has undermined the stability of financial markets in recent months, creating real concern about continued depreciation and inflation. All of this was perfectly true a week ago.
Yet a bunch of ministers from the Shas party were fired a week ago for failing to support tighter budgetary policy, and the prime minister and finance minister show signs that they are serious about decreasing the deficit by NIS 13 billion.
Therefore, if the emergency package is approved by the Knesset in its current form, this will herald a fiscal cutback during the next year and a half. In this situation, we do not need to be so tough in monetary policy. This means that an interest rate hike of less than 1% would have sufficed.
There is one big condition in this whole scenario - keeping Shas in opposition until the Knesset passes the emergency plan. Toward this end, the Knesset yesterday established a special committee - circumventing Finance Committee chairman Ya'akov Litzman MK (United Torah Judaism).
There is a clear majority for the plan in both the committee and Knesset with the votes of Likud, Labor, Yisrael B'Aliyah, Center Party, Shinui and National Religious Party. So now all of the responsibility is placed upon the shoulders of Weizman Shiri (who will be chosen to chair the special committee).
He has the opportunity to demonstrate leadership, to pass the emergency plan quickly, within two days, as the emergency situation demands. And perhaps to win the trust of the public and his fellow MKs, none other than Weizman Shiri will be the one to give up the Negev Law that he himself helped create.