Prime Minister Ehud Barak has promised Minister of Finance Avraham Shochat his support in Shochat’s wrestling match with Governor of the Bank of Israel Yaakov Frenkel to bring down the real interest rate, which currently stands at 8% per annum. The result is likely to be that Frenkel will shortly resign.
"Globes" learned that Barak has permitted Shochat to give Frenkel an ultimatum: either toe the government’s policy line and reduce the real interest rate by 2%-4% in a short period of time, or resign his office. The move was evidently co-ordinated with Knesset Finance Committee chairman MK Eli Goldschmidt. In view of this understanding, Shochat has recently started heating up the atmosphere between himself and the Governor.
Possible candidates are now being named for replacing Frenkel. They include Bank Leumi chairman Eitan Raf, whom Shochat greatly esteems.
Shochat obtained Barak’s promise on the matter shortly before the government was formed, and again, shortly after. Barak gave his promise after consulting with some of his closest friends, including Dov Lautman, and discovering that capitalists and large companies are deterred from stepping up investments (and creating jobs) due to the high real interest rate.
Barak is convinced that there is scant chance of bringing about growth unless he takes steps at this juncture for a drastic reduction of the real interest rate, even at the cost of Frenkel's resignation.
Shochat attempted to spearhead a similar move while serving as Minister of Finance in 1995-1996, but did not receive the backing of the then Prime Minister Yitzhak Rabin. Rabin took care to preserve the Governor’s independence, and upheld Frenkel's view that the realities of the situation dictated a high interest rate. Rabin frequently received Frenkel at his home for working sessions, and backed him vis-a-vis the political system.
Published by Israel's Business Arena July 28, 1999