Fischer rebuffs calls for rate cut

We have an inflation problem, governor says.

stanley fischer a 88 224 (photo credit: Ariel Jerozolimski)
stanley fischer a 88 224
(photo credit: Ariel Jerozolimski)
Governor of the Bank of Israel Prof. Stanley Fischer said Sunday that because of strong inflationary pressures and high capital inflows the central bank was not in a situation in which it could cut interest rates to halt the shekel's rally. The bank's role was to take all necessary measures to safeguard the local economy from a slowdown in the world economy, Fischer said. "We have an inflation problem and there are no signs of inflationary pressures easing," Fischer said at an ad hoc press conference convened in reaction to legislation proposed by manufacturers and the Histadrut Labor Federation aimed at forcing Fischer to cut interest rates. "Our problem is that the local economy is in a very good situation relative to the world economy, attracting large capital inflows from foreign investors and from Israelis shifting capital back home, thereby putting pressure on the exchange rate," he said. Therefore, Fischer said, the interest rate could not be lowered while inflation was above the government's price target range of between 1 percent and 3% (at 3.4% in December), the economy was growing and unemployment was down to 6.6%, the lowest in 15 years. Last week, the shekel appreciated to 3.55 against the dollar, the highest level in 10 years, prompting calls from exporters and manufacturers to cut the Bank of Israel's key base lending rate, which stands at 4.25%, to depreciate the shekel. "An interest rate cut will not necessarily halt these processes and lower the shekel-dollar exchange rate," said Fischer. "On the contrary, an interest rate cut when inflationary pressure is high is also liable to create inflation and raise prices, and then interest rates would need to be raised again. We made this mistake in 2001 when interest rates were lowered and then raised by 4 percentage points over next few months." Fischer added that the local currency was about 5% stronger than its average when weighted against the basket of currencies in the last two years, which was a "serious" but not "huge" gain. "At the same time, we are likely to see the shekel continue appreciating in the long-term as continued economic growth will raise the local economy from an emerging market status to a developed status," said Fischer. "Although I have much sympathy for exporters and in particular for traditional businesses suffering from the weak dollar, they need to find ways to adapt to this new situation by cutting costs and focusing on innovation." The proposal by the Israel Manufacturers Association and the Histadrut seeks to amend the 1954 Bank of Israel Law. At present, the Bank of Israel's mandate when making interest rate decisions is solely to keep inflation under control. Under the proposed change, the central bank would also take into account employment and economic growth. Shraga Brosh, president of the Manufacturers Association, said Fischer needed to pursue three targets equally: inflation, employment and growth, which would force him to lower interest rates by 50 basis points (0.5%) to weaken the shekel. "The Bank of Israel has missed the inflation target four times over the past six years," said Brosh. "The pursuit of the inflation target has cost us the loss of thousands of jobs as well as percentages of growth." Fischer rejected the proposal, saying it was not advisable to make changes to a law that had been in place for 50 years and endanger price stability by playing "populist games." "Changes to monetary policy must stay in the hands of the Bank of Israel to maintain a stable economy and not be governed by powerful interest groups in the economy," Fischer said. Over the coming weeks, Brosh and Histadrut Labor Federation Chairman Ofer Eini plan to collect signatures from dozens of Knesset members in support of their legislative proposal.