US embassy cable - 04TELAVIV2035

UNCLAS TEL AVIV 002035 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, IS, ECONOMY AND FINANCE 
SUBJECT: BOI Reduces Interest by 0.2% in March 
 
 
This cable is classified Sensitive but Unclassified.  Please 
handle accordingly. 
 
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Summary 
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1. (U) On March 29, the Bank of Israel announced a 0.2 
percent reduction in interest rates.  This brings the Bank 
of Israel interest rate to 4.1 percent and represents the 
thirteenth consecutive interest rate decline since the end 
of March, 2003.  In the press release accompanying its 
latest rate decision, the BOI indicated that its current 
monetary policy would continue as long as inflation is 
consistent with its inflation target of 1 - 3 percent. 
Although Histadrut leader Amir Peretz criticized the cut as 
too small, most commentators praised it as economically 
helpful.  End Summary. 
 
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Surprise: Klein Cuts and Hints May Keep Cutting 
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2. (U) Prior to the latest interest rate announcement, a 
number of economists and market analysts predicted the BOI 
would call a halt to its monthly rate cuts.  They noted the 
rate had already neared 4 percent, and claimed that during 
2004 the US and Israel were likely to begin raising interest 
rates.  In a fairly surprising turn of events, the BOI 
decided to continue cutting, if just by 0.2 percent.  The 
Bank, in its March 29 press release, justified the move by 
noting that its interest rate policy is geared towards 
bringing inflation in line with the range of price 
stability, 1 - 3 percent a year.  It noted that inflation 
expectations were still below the lower limit of the target, 
at around 1.2 percent. 
 
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BOI Boo Boo: It Missed Target in Both 2002 and 2003 
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3. (U) In its 2003 annual report, published March 30, the 
BOI acknowledged years of criticism for having consistently 
missed its inflation target in 2002 and 2003.  The report 
attempts to deflect this criticism, however, by referring to 
numerous exogenous factors that made the target ever more 
elusive:  sudden changes in exchange rates, the development 
in Israel of an inflationary mentality, receipt of the U.S. 
Loan Guarantees, the rapid end to the War in Iraq.  The BOI 
notes that the policy backdrop in 2003, when the GOI 
embarked on a serious program of economic reform, was 
completely contrary to that in 2002, which was marked by 
uncertainty, increased inflation, and a return to higher 
interest rates. 
 
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Amir Peretz Kicks a Gift Horse in the Teeth? 
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4. (U) Commentary on the BOI cut was, for the most part, 
muted.  Histadrut leader Amir Peretz however, denounced it 
as "too little too late," and said households continue to be 
harmed by high rates.  He told Haaretz in the March 30 
edition that a reduction in interest should have been part 
of an overall joint economic plan between the Histadrut, the 
GOI and employers intended to accelerate growth and increase 
the number of jobs. 
 
5.  (U) Others were significantly more positive in their 
remarks.  Chairman of the Economic Committee of the 
Manufacturers Association, Rimon Ben Shaul, told Haaretz in 
the same March 30 article that the BOI acted correctly in 
continuing to reduce interest and should continue to do so 
in the coming months.  Shaul noted "this would help in 
strengthening the recovery trend."  He added that a 
"necessary condition for continuing to reduce interest rates 
is strictness in maintaining the budget and deficit target." 
 
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BOI: 4 Percent Deficit in 2004 "Attainable" 
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6. (U) The BOI noted in its press release that "assessments 
of the development of fiscal policy over the year suggest 
that the budget target set by the government at 4 percent of 
GDP is attainable."   This is a far cry from BOI's past 
criticism of GOI laxness regarding fiscal responsibility, 
and testament to the newfound BoI-MoF policy consensus on 
fiscal issues. 
 
Kurtzer