On Monday, the Bank of Israel kept the interest rate for June unchanged at 2.5% for the fifth consecutive month. The decision may have people asking what the central bank's top officials are really thinking, as the accompanying announcement provided few clues about their concerns.
This may be why a top Bank of Israel official told "Globes" shortly after the announcement, "If necessary, the monetary council will convene to make extraordinary decisions."
It should be remembered that the Bank of Israel's monetary council met to make an extraordinary decision three weeks after the collapse of Lehman Brothers in September 2008, the event that marked the onset of the global financial crisis which caused a deep and almost unprecedented recession. In that decision, the Bank of Israel slashed the interest rate by 50 basis points in the middle of the business day.
A reminder: between October 2008 and February 2009, the Bank of Israel cut the interest rate by 300 basis points from 4% to 1%. If Governor of the Bank of Israel Prof. Stanley Fischer and his colleagues on the monetary council want to make clear that they are ready, willing, and able to gain take extraordinary measures, it is a sign that they fear that the winds of September-October 2008 - the black months when the global financial system was on the brink of collapse - are returning. Hence the surprising disconnect between Monday's interest rate decision and the reality at the Bank of Israel.
For a long time, Fischer, and the financier who has accompanied him for years, Barry Topf, have been reiterating that they know how to deal with the recession in Europe, but in the event of a financial crisis, they cannot know what the repercussions could be, and that anything could happen.
It turns out that Fischer and the other professors sense that the global economy, and most of all its financial system, have reached boiling point. Greece's possible departure from the Eurozone, the shaky condition of European banking, including in Spain, the every worsening debt crisis, the lack of determination by Europe's leaders to take tough decisions - austerity or expansion, Eurobonds or guarantees - and the recession that is already battering the non-financial sector, have together sounded the alarm bells on the seventh floor of the Bank of Israel building in Jerusalem.
Fischer and his colleagues want to make something absolutely clear to us: things will get bad in the best case, and they could get very bad.
Israel's responsible adult
It is already clear to everyone that the in-house forecast by the Bank of Israel's Research Department that the next interest rate move will be upwards, but only in the second half of 2013, is utterly irrelevant. The central bank will revert to an expansionist monetary policy. More precisely, it will again be expansionist, because in practice, the real interest rate (the nominal rate after deducting inflation expectations) fell back into negative territory in February.
We are already familiar with the significance of the macroeconomic policy of the pending downturn in the global economy, including from events of late 2008. The responsibility for navigating the economy is returning to the Bank of Israel and Fischer, because the Ministry of Finance, and the man who heads it, are already out of the game. The ministry has spent beyond what is permissible, and it now must decide how to make an astronomical NIS 15-20 billion budget cut. There is no room for fiscal expansion. Minister of Finance Yuval Steinitz and Prime Minister Benjamin Netanyahu have already played this card - at the height of economic growth - and that is a shame.
Moreover, the Ministry of Finance will have to decide on tax hikes to cope with the burgeoning deficit, a measure that will further harm economic growth. The steering wheel is back in the hands of Israel's veteran, and apparently only, responsible adult.
Published by Globes [online], Israel business news - www.globes-online.com - on May 30, 2012
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