When a person (or a central bank) attempts to reach a
supposed state of equilibrium, a measure of scepticism is
clearly required of those effectuating the policy and of
its critics. For this reason, we have been in no hurry
to sound off as regards every percentage change in the
interest rate. On the contrary, we have waited to hear
what the economy has to say.
This time, the message came loud and clear from all
directions: the present interest rate is too high, it is
upsetting the macro-economic balance. The way the basket
exchange rate has firmly dug in at about 6% below the
slant line, patently indicates deviation. The capital
market crisis itself expresses the overly high price of
the money issued by the central bank.
The Bank of Israel, true to form, cites a long series
of conditions that enable the interest rate to be
lowered by precisely 0.7% and not a fraction more. But,
in its publications, the Bank always emphasises that the
interest rate decision is dictated by long-term
considerations, rather than the highly contradictory
status of a single month. From that vantage point, there
is no doubt the economy is no longer over-heated, and the
anticipated inflation rate will be more moderate. The
interest rate, accordingly, could have been lowered
more.
Worth questioning, in the same context, is the very
method whereby the interest rate undergoes frequent,
small adjustments, reflected in 13 changes over the past
20 months. If, in fact, the practise of looking forward
is designed to seize upon a stable trend, then why, on
the basis of that practise, does the interest rate
fluctuate so frequently? If the monetary policy operates
in a not entirely knowable time range, and in a lag of at
least half a year, (as most economists agree it does),
then at what target is each monthly change directed?
And a final question: if the Bank of Israel is bold
enough to hike the interest rate by 1.5%, as it did at
the end of June, what is its excuse for the excessive
caution shown in the downward correction?