Sunday, February 10, 2008

Squeezing the Central Bank

Stanley Fischer (Photo)

A coalition of populist (or demagogic) forces is pressuring Bank of Israel Governor Stanley Fischer to lower interest rates (see Ha'aretz). Those pushing for the change are the Israeli Manufacturers' Association, which is suffering because of the high shekel, on the one hand, and parliamentarians ranging from Shelly Yachimovich (Labor) to Amnon Cohen (Shas). They want to see a reduction in interest rates to help workers in the export industry. If implemented, their agenda would set Israel back two decades. This kind of short-sighted intervention in fiscal policy by politicians, concerned about upcoming elections rather than the long-term economic growth of the country, will severely undermine investors' confidence in the Israeli market. The Central Bank's role is to check inflation by maintaining a strong currency; it should not be instrument of particular economic and social sectors. The export industry will have to adjust, just like the exporters in other countries who have experienced increases in the value of their currency against the dollar.

4 comments:

ariel said...

What do you mean this would set Israel back two decades? I don't know anything about the central bank's history, but I imagine its sole mandate to keep inflation down is the legacy of another era in the Israeli economy. Is it so clear that taking on other considerations, as with other central banks, is inappropriate?

Nobody said...

Is it so clear that taking on other considerations, as with other central banks, is inappropriate?

yes... it's clear ... it's a standard policy these days in the world... in any normal country to demand such a thing would be unthinkable ...

shas is also campaigning for the return of child pensions by the way and this could inflict on us a real disaster ... they seem to have allies on this among the so called social camp ....

may god save us from these populists...

Derek said...

amos, this is a very interesting article:

http://www.nybooks.com/articles/21031

Amos said...

Ariel,

It seems that the chairman of the Manufacturers' Association has swallowed his earlier words:

Shraga Brosh, chairman of the Manufacturers Association, made the announcement on the urging of Finance Committee Chairman MK Stas Misezhnikov (Yisrael Beiteinu).

"The focus should be on alternative solutions to the dollar problem. The Bank of Israel governor will deal with monetary policy, and the government will deal with fiscal policy. Interest rate policy should remain in the hands of the governor," Misezhnikov said
(Ha'aretz).