IMF: Israel's monetary policy too conservative

Source: Israel Business Arena

The International Monetary Fund praised the Ministry of Finance, the 2004 budget, and the labor and welfare reforms.

The Israeli economy is under deflationary pressure, which makes it possible to continuing cutting the interest rate. At the same time, the cuts should be gradual, and monetary policy should be made more transparent.

This evaluation was contained in an preliminary annual report on the Israeli economy by an International Monetary Fund (IMF) delegation, headed by IMF deputy manager of the European department Jose Fajgenbaum. The report was submitted today to Minister of Finance Benjamin Netanyahu and Governor of the Bank of Israel David Klein.

The IMF hinted that the response of monetary policy to events was inadequate, and the pace of interest rate cuts too slow. The IMF report stated, "In retrospect, it was too conservative, and caused inflation to be less than the government target. A further relaxation of monetary policy is probably required, in view of the fall in the Consumer Price Index."

The IMF delegation praised the 2004 budget, and Minister of Finance Benjamin Netanyahu's measures. They added that 4% of GDP budget deficit target would be achieved if the Knessset approves the budget. The report supports the Ministry of Finance view that if recovery in 2004 is less than forecast, a 0.5% of GDP deviation from the budget deficit target can be considered. If growth exceeds the forecast, the surplus revenue should be used to reduce government debt.

The IMF is optimistic about 2004, predicting 2% growth, compared with 1% in the current year, assuming the security situation does not deteriorate. The IFM forecast is a compromise between conflicting Ministry of Finance and Bank of Israel forecasts.