The governor of the Bank of Israel, David Klein, reduced the
interest rate in Israel by 0.2 percent on Monday. The
interest rate for March 2001 will be 7.5 percent. Some
observers had been hoping for a reduction of 0.3 percent.
The action was taken against a backdrop of a bitter labor
dispute inside the Bank of Israel that has hampered the
conduct of economic policy.
Generally the announcement of a drop in interest rates is
accompanied by detailed facts and figures discussing the
move. However a labor dispute since early February has
resulted in important normal steps not taken: data has not
been submitted by four departments and no discussions of
policy have been conducted with department heads, nor with
the governor in a larger forum. Thus the statement released
by the governor yesterday focused on the labor dispute and
not on the interest rate move.
The new governor has been in office for 14 months. During
his tenure, he has reduced the interest rate by well over 3
percent and brought it much closer to the American rate.
After a sharp rate cut in America in January of 1 percent,
the American rate now stands at 5.5 percent, leaving a 2
percent differential that is accounted for by the increased
risk of investment in the Israeli economy. Economists try to
evaluate the proper risk premium by comparing interest rates
on government bonds that are set by the free markets. By
those measures there is a 1.2 percent differential on short
term money (six-month bonds) and a 2 percent differential on
longer term money (10 years).
Given Israel's extremely low inflation (0 percent last year)
the real interest rate is very high. Government economists
had planned for inflation of about 3 percent this year, but
it appears that it may be lower. The lower the inflation,
the higher the real rate of interest is.
Industry complains that the interest rate in Israel is too
high, but the governor maintains that the uncertainty and
potential instability of the economy require caution in
lowering the rates.
The key issue in the labor dispute is the extent of
automatic promotions that will be granted each year to
employees of the Bank of Israel. The workers demanded that
35-40 percent of employees receive promotions every year,
while according to published reports, bank management is
willing to promote 25-30 percent of employees.
In the Wage Commissioner's reports, Bank of Israel employees
already appear at the top of the salary charts year after
year. According to last year's report, in 1998 dozens of top
officials earned an average of NIS 41,106 ($10,025) per
month (a wage cost of NIS 54,193-$13,200), 110 "high wage
earners" were paid NIS 34,105 ($8,300) and 745 graded
workers made NIS 14,303 ($3490) after two years of automatic
promotions. When Wage Commissioner Yuval Rachlevski
submitted his report in February of last year, he told the
Bank of Israel that "there appear to be wage irregularities"
from one job contract to the next, in the execution of
existing contracts and in granting promotions. Rachlevski
promised that a comprehensive report on wage figures at the
bank would be released by the end of 2000. The year 2000 has
already come and gone, yet the report has yet to appear.
Some observers say that a serious assessment should be made
whether all 860 of the bank's workers are really needed, or
whether the bank could make do with much less. The number of
employees at the Bank of Israel relative to the population
is greater than the number of employees at the central banks
of Britain, Canada, New Zealand, Switzerland and many other
countries, based on statistics published recently in the
weekly Economist magazine (although even more
inflated administrative staffs are not lacking in the
banking industry, which has no shortage of money and where
supervision is liable to be problematic).
The Bank has asked the politicians, Prime Minister Ehud
Barak and Finance Minister Avraham Shochat, to ask the
courts to order 40 of the bank's workers back to work.
However, so far they have not taken any steps, and any such
moves will probably have to wait the formation of the new