Identifier
Created
Classification
Origin
05TELAVIV6763
2005-12-02 15:18:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Tel Aviv
Cable title:  

Fischer Takes Command: BOI Rate Hike Counters

Tags:  ECON EFIN IS ECONOMY AND FINANCE 
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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
-------

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.


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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