Note: The translations of articles from the Hebrew press
are prepared by the Government Press Office
as a service to foreign journalists in Israel.
They express the views of the authors.
The Quiet Is the Message
(Commentary by Tamar Ben-Yosef, "Globes", Aug 11, 1999, p.3)
Before beginning a draconian analysis of the inflation target, it is
important to emphasize that its quiet presentation is the message. In
recent years the target's declaration was accompanied by by a damaging
battle between the Bank of Israel and the Finance Ministry not only
about the numbers, but also about who makes the decisions. Formally, it is
the Finance Ministry who presents the final proposal to the cabinet. But
the open power struggle right up to the last moment weakens the authority
of the final declared target even before it is made.
Setting the target, in and of itself, has political significance, and
placing it in the Finance Ministry's court gives the Ministry an
advantage. But since fighting inflation is placed solely in the hands of
the Bank of Israel, it is very desirable that the those carrying out the
mission have their hearts in it. The government decision of August 1998
requires a warning by the central bank following a breach of the target by
1% or more, accompanied by an analysis of the causes and recommendations
for remedial action.
This system seems severe, but to any veteran it is clear that there is no
realistic way to guarantee a bullseye on the target. The direct conclusion
is that all ex post facto explanations have little value. Without
digressing too far, it can also be said that the agreement on the
inflation target includes a mutual understanding regarding monetary policy
on the basis of the Bank of Israel's management of inflation which is
inherent in its guiding of interest and exchange rates. This does not
mean, however, that they have reached any ability to live together.
The attempt to focus on the numerical target that has been set can be
called reasonable, but is certainly not self-evident. 1999 will probably
close with the CPI up by 2-3%, but the projection for 2000 is about 5%.
Inflation for the coming year is expected to reach 5%, once capital market
operatives internalize the latest devaluation, as well as the devaluations
that are yet to come. Thus, easing the target is not compatible with a
soft monetary policy.
The same diagnosis can be made for 2001. Presenting the long-term target
is a signpost for the economy. But a continuous and sustainable
realization is not an easy or simple mission. Those who prepare the target
are also the most aware that realization it is dependent on unpredictable
external shocks. The government's test will come when it acts with
sagacity and flexibility in such unpredictable situations.