“I see no reason to panic,” former governor of the Bank of Israel told “Globes”. “Short-term loans (STLs) are one of the best sensors of capital market trends. But I don’t think that the interest rate should be determined by just one indicator. This is a market, and it cannot be ignored. However, it’s premature to say whether this is a trend or a correction.”
Klein added that every incident should be put into a broader context. “We know from other countries that a low interest rate can create inflation in the financial, stock and housing markets, as well as raise exchange rates on the foreign currency market. We should therefore expect that, as long as the trend toward lowering interest rates lasts, this will be the result.”
Klein said that the Bank of Israel should restore inflation to within the 1-3% target range; i.e. act to increase inflation. “Inflation in the past 12 months has greatly undershot the target range, and the Bank of Israel ought to ensure that this stops, and restore inflation to within the target range.”
Klein believes that the Bank of Israel should make more interest rate cuts. “The Bank of Israel has maneuvering room to make another interest rate cut. It should continue with its present policy. I don’t know whether this is a distress signal, but the internal logic should be recognized. Obviously, it’s impossible to cut the interest rate without limit.”
Klein concluded, “Market players should understand that, when the moment comes for the Bank of Israel to raise rates, it may have to raise rates faster than the pace at which it cut them. There’s no reason for distress. Investors will have to take into account the risk that the pace of interest rate hikes will be faster than the cuts.
Published by Globes [online], Israel business news - www.globes.co.il - on June 10, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007