The governor of the Bank of Israel will decide today to raise interest rates, apparently by a lot. He has no choice.

The call is sounding from all the streets and alleys of the capital market: Raise the rates, quickly and substantially. One percent won't cut it. Neither will 2%, three would be better.

There's no choice because the market has already gone ahead and raised the interest without you. The yield on a short-term loan for one year is approaching 10%. And the yield on a nine-year Shahar bond is over 11%.. How can the central bank lag with interest of 7.1%?

If these signals from the capital market are not enough, inflationary expectations are hovering around 6%, double and more the official "price stability goal" of 1% to 3%.

"Stability" is the goal of the bank, and inflation is its chief enemy. The gains of the consumer price index show that the beast is back, inflation has raised its head. This year so far it has returned to 4.9%. By year-end it may well reach 8%. Facing that threat, the governor cannot dawdle.

Cannot? Perhaps it is worth remembering what lies behind the specter of inflation. Is it a huge flood of demand by the public sector, or by private households? Certainly not. The cutbacks in the state budget have reduced public sector demands, and the intense recession has done the same for private demand. Is it the pressure of costs? Not wages; employers are remaining tightfisted in the face of wage demands.

Nevertheless, it is true that other costs have risen, mainly due to the devaluation of the shekel in recent months. Devaluation is the main reason for rising costs.

The CPI increased by 4.9% from January to May. During that time, the dollar strengthened by 12% against the shekel. Imports are key to Israel, hence "inflation" in the wake of the rising dollar is unavoidable. We can be glad that its rate is low relative to the rate of devaluation, thanks to the recession.

That being the case, the governor is actually fighting not against inflation per se, but against the dollar.

He must repress the devaluation so that it will cease turning the wheel of prices. This has been the true goal of the Bank of Israel since it began raising the interest rates in March: to stop the race of the dollar.

What are its chances?

In ordinary conditions, the interest gap should have ended the devaluation. The difference between the interest set by the Bank of Israel and that of the U.S. Federal Reserve Bank is 5.35%, and investors can receive, in a risk-free investment in short-term debt certificates or in Shahar (does anyone seriously believe that the Bank of Israel or the Israeli government could declare bankruptcy?) five times more than by investing in the dollar. In light of the shekel's advantage, shouldn't the devaluation end?

If it hasn't ended, or doesn't end, there are other reasons why it is racing on, and they don't lie in economics.

Fears of a security crisis have been the key cause of the shekel's erosion. That will probably continue. Businesses and private citizens seek safe harbor in the dollar. No rate hikes, nor budget cutbacks, can combat that.

And what if the devaluation continues this week or next - will the governor raise interest again? Up to what point? Monetary policy is not effective against security fears.

The only result of the interest race after the dollar and the budget cutbacks (and new taxes) will be to choke economic activity even more. The Israeli economy will enter the hard times that await it in any case under even more difficult conditions, that we ourselves have created.