Dei'ah veDibur - Information & Insight

A Window into the Chareidi World

5 Adar 5761 - February 28, 2001 | Mordecai Plaut, director Published Weekly








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Interest Rate Reduced by 0.2 Percent

by M. Plaut

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 government.


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