Yaakov Frenkel, Governor of the Bank of Israel, this
morning decided to raise the interest rate in the economy
by 1.5%, following the accelerated rate of inflation. The
rise will take effect this Thursday.
In the space of two months, the monetary interest rate
has risen by 3% in three successive moves, reaching 17%,
the level of the beginning of 1995. The Bank of Israel
emphasises that this increase is essential in view of the
high inflation rate in the economy and is needful for
achieving the 8%-10% inflation target set by the
government.
The five leading banks today announced that,
commencing Friday, they will raise the base interest rate
by an identical 1.5%, so that starting Friday, the prime
rate in all banks will stand at 18.5% in lieu of the 17%
in effect hitherto.
Other components remain unchanged, except at the First
International Bank, which has announced an increase in
the charge for unauthorised exceptions from 2.75% to
3%.
Bank of Israel officials emphasise that in addition to
the high price indices of recent months, a sharp rise,
reaching 13.5%, was also recorded in inflation
expectations for the coming year.
Frenkel this morning reported his decision to raise
the interest rate to prime minister Benjamin Netanyahu
and to finance minister Dan Meridor. Frenkel`s office
emphasises that this was a professional, businesslike
decision, unrelated to the change of government or to any
understanding existing between Frenkel on the one hand
and Netanyahu and Meridor on the other.
Frenkel today stated that "The conditions are now
being brought about for the budget to be slashed and the
economic policy to be reshaped. We are no longer alone in
the economic campaign, but are entering upon an era of
all-inclusive policy, with an expectation of budgetary
moves". Frenkel says that until the budgetary restraint
policy yields fruit, monetary restraint must continue, so
as to prevent erosion of the real interest rate.
The Treasury declined to comment on the increase in
the interest rate. Said the Treasury spokesman: "We have
no comment on the decision to raise the interest rate,
and will be at pains to preserve the independence of the
Bank of Israel, under whose jurisdiction the
determination of the interest rate lies". The increase of
the interest rate is believed to have met with
understanding at the Treasury, as part of the effort
being made to reduce inflation. Government concerns
assessed that difficulties might arise in implementing a
significant slash in the 1996 budget, and the high
interest rate will accordingly serve as a principal tool
in the war on inflation.