US embassy cable - 05TELAVIV6763

UNCLAS SECTION 01 OF 02 TEL AVIV 006763 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, IS, ECONOMY AND FINANCE 
SUBJECT: Fischer Takes Command: BOI Rate Hike Counters 
Inflation Threat 
 
This cable is classified Sensitive but Unclassified.  Please 
handle accordingly. 
 
------- 
Summary 
------- 
 
1. (SBU) In an expected move, the Bank of Israel (BOI) 
announced a 0.5 increase in interest rates on November 28, 
bringing the base rate to 4.5 percent.  This was the Central 
Bank's third consecutive monthly hike, and the most 
pronounced, following increases of 0.25 percent at the end 
of both September and October.  This sharper increase is the 
BOI's attempt to return inflation to the mid-point of the 1 
to 3 percent GOI target range.  Inflation for the first 10 
months of 2005 was 2.7 percent, inching towards the upper 
limit of the range, with the November and December inflation 
figures yet to be reported.  With this move, BOI Governor 
Stanley Fischer has demonstrated an intention to pursue an 
aggressive monetary policy to keep inflation in check.  The 
CBS released third quarter unemployment figures, which 
indicated a decline to 8.9 percent from the second quarter's 
9.1 percent.  In addition, the rating agency Fitch confirmed 
its positive rating outlook for Israel and noted the 
economic achievements of the Sharon government.  Finance 
Minister Olmert commented that responsible and balanced 
economic policies need to be maintained in order for rating 
agencies to upgrade their ratings of the Israeli economy. 
End Summary. 
 
 
------------------------- 
BOI Wants Price stability 
------------------------- 
 
2. (U) The BOI's November 28 press release explicitly states 
that its aim is to achieve price stability, which is defined 
as inflation of 1 - 3 percent.  In the concluding paragraph, 
after listing the reasons for the interest rate increase, 
the press release states, "The Bank will continue to keep 
inflation under close and constant review, with the 
intention of reaching the government's target without 
deviating from it either upwards or downwards." 
 
3. (SBU) Inflation rates during the Governorship of Stanley 
Fischer's predecessor, David Klein, from the beginning of 
2000 to early 2005 were 0 percent in 2000, 1.4 percent in 
2001, 6.5 percent in 2002, -1.9 percent in 2003, and 1.2 
percent in 2004.  These inflation figures should be viewed 
in the context of the Intifada and the ongoing aggravated 
security situation, negative growth, and the government's 
austere fiscal situation, all of which made monetary policy 
decisions more difficult than usual.  By raising interest 
rates a full half point instead of just a quarter point, 
Fischer showed that he intends to pursue an aggressive 
monetary policy to keep inflation in check.  The BOI's press 
release noted that it could take several months to return 
inflation to the mid-point of the target range. 
 
--------------------------------- 
The Rate Hike Supports the Shekel 
--------------------------------- 
 
4.  (U) One of the major factors that led to the increase in 
inflation in the last few months has been the rapid rise in 
the dollar vis--vis the shekel.  The average monthly 
dollar/shekel exchange rate increased from NIS 4.54 in 
September to NIS 4.63 in October.  After trading in the NIS 
4.70 to 4.74 range during the first half of November, market 
anticipation of another rate increase brought the dollar 
down to just under NIS 4.70 just before the increase was 
announced. The day after the announcement, the shekel 
appreciated against the dollar, and is now trading in the 
NIS 4.65 range. 
 
--------------------------------------------- -------------- 
Maintaining Fiscal Discipline Despite Political Uncertainty 
--------------------------------------------- -------------- 
 
5. (U) In its press release, the BOI alluded to the general 
political situation in Israel by noting that the rate was 
raised, in part, to counter the prevailing political 
uncertainty.  The release also noted the BOI's expectation 
that the GOI is likely to maintain fiscal discipline. 
 
--------------------------------------------- --- 
Fitch Retains Strong Ratings for Israeli Economy 
--------------------------------------------- --- 
 
6. (U) The Fitch rating agency, in a November 28 statement, 
retained its A minus rating for foreign and A rating for 
domestic debt, and noted that the Israeli economy remains 
stable, despite an atmosphere of uncertainty.  Fitch expects 
the 2006 budget and policy framework to be similar to 2005, 
and maintained that the impact of the elections, "if any," 
will only become evident in the framework of the 2007 
budget.  The Fitch analyst noted, however, that "there is no 
room for complacency." 
--------------------------------------------- 
No Upgrade, but MOF Pleased with Fitch Report 
--------------------------------------------- 
 
7. (U) In its report, Fitch emphasized the important fiscal 
and structural reforms implemented by the Sharon government, 
which contributed significantly to stabilizing Israel's 
creditworthiness.  Following the Fitch announcement, Finance 
Minister Ehud Olmert noted the GOI's restraint in fiscal 
policy and confirmed that the government would continue to 
make structural reforms, which he said would improve 
Israel's growth prospects.  The Minister added that 
responsible and balanced economic policies need to be 
maintained in order for rating agencies to upgrade their 
ratings of the Israeli economy.  In a public comment, Dr. 
Yaron Zelekha, the Accountant General, noted Fitch's 
assessment that a continued gradual decline in the public 
debt could bring about an eventual upgrade in the rating. 
 
----------------- 
Unemployment Down 
----------------- 
 
8. (U) In an additional piece of positive economic news, the 
Central Bureau of Statistics reported on November 28 that 
unemployment declined from 9.1 percent in the 
second quarter to 8.9 percent in the third quarter. 
This is the first time since 2001 that unemployment has been 
below 9%.  The number of employed persons increased by 
83,200 (3.5%) in the first 9 months of the year, compared 
with the comparable period in 2004.  Average unemployment 
from January to September was 9.1 percent. 
 
--------------------------------------------- 
Labor Participation Rate Steady - and Too Low 
--------------------------------------------- 
 
9. (SBU) Unemployment rates may continue to marginally 
decline in the coming months as a result of a pool of jobs 
traditionally created in conjunction with elections. 
However, many of these jobs will be temporary and will not 
provide permanent relief to the chronically unemployed.  In 
addition, the latest labor participation rate just released 
by the CBS for the third quarter remained at 55.2 percent, 
somewhat lower than the rates in other developed economies. 
Therefore, meaningfully reducing unemployment and increasing 
labor participation will remain critical challenges for the 
next Israeli government. 
 
JONES