"The Bank of Israel will almost certainly have to raise the interest rate to some degree, in order to preserve balance in the foreign currency market," said former Governor of the Bank of Israel David Klein at a conference today hosted by the Tel Aviv Stock Exchange (TASE) and Ma'ariv.
"The US interest will also rise gradually, and when I say 'gradually', I'm talking about a 2% rise. The interest rate gap [between Israel and the US] will presumably not stay at its current level, in order to avoid a disturbance in the balance between foreign currency exchange rates.
"The main reasons why it's now possible to maintain a lower interest rate gap than in the past are shekel policies, and changes made in recent years. One change made in August 2000 was to institute a price stability target instead of inflation target. The second change was made in December 2001, when we lifted foreign currency controls under an agreement with the prime minister. The foreign currency exchange rate has since then operated in a completely free market.
"At the same time, we removed the limits on short-term loans, thereby creating an important infrastructure for the financial market. The moment there's a financial market with a stable infrastructure, it's easier to manage monetary policy.
"All these processes have a decisive effect on the public's financial assets portfolio. I believe that as a result, we'll see more stocks, more overseas investment by Israelis as part of the diversification of the portfolio, and less investment in index-linked instruments. We'll see more tradable assets, and fewer deposits in banks, and we'll see more private bonds than government bonds."
Published by Globes [online], Israel business news - www.globes.co.il - on February 1, 2005