Bank of Israel is setting the stage for an interest rate hike in the next few months. In the inflation report for the second half of 2001 which the bank submitted today to the cabinet and the Knesset, Governor David Klein indicates that the bank has agreed on a one-time 2% interest rate slash as part of a comprehensive economic policy aimed at overcoming the slump caused by the global slowdown.

According to Klein the government is failing to exercise fiscal restraint as mandated by the comprehensive policy, and unless other policies are implemented as planned, it will become impossible to maintain steady interest rates in the short term.

When interest rates are not steady, the governor believes reactions affect the public's financial behavior, particularly in the foreign currency and bond markets, as well as global ratings of the market's performance.

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