International Business Outlook
ISRAEL TRAINS ITS GUNS ON INFLATION
Israel is finally getting serious about inflation. With the 1994 rate projected at 14.4%, far above the government's 8% target, the Israeli Cabinet approved a plan on Sept. 11 aimed at cutting 1995 inflation to 8% to 11%.
Israel has traditionally suffered higher inflation than its Western neighbors. Although its readings in recent years contrast sharply with the triple-digit rates of the 1970s and 1980s, Bank of Israel Governor Jacob A. Frenkel has warned that Israel's export competitiveness, long-term growth, and general integration into the world economy are all endangered if inflation is not brought down to the 2%-to-3% levels of its trading partners. The August consumer price index rose 1.1%, the sixth month in a row that the CPI has increased 1% or more.
The plan's centerpiece is higher interest rates. In late August, the central bank raised the base lending rate by 1.5 points, to 14%, and commercial banks upped their prime rates to 15.5%. More hikes seem likely. Because of booming exports, the economy is growing at 6% to 7% per year, and high inflation means that real interest rates are still close to zero. Also, many commercial lending rates are not tied to the base rate.
But since the two biggest inflation problems are largely immune to higher rates, the plan goes beyond tighter monetary policy. Housing, fruits, and vegetables are a third of the CPI. Together, their prices are rising 20% annually.
For example, a shortage of buildable land has doubled land prices in central Israel in the past two years. The plan calls for a committee to consider freeing up state-owned real estate, cutting taxes on building materials, and improving access to and from peripheral areas.
Food inflation has resulted from a bad harvest and import restrictions. So for the first time in Israel's history, the government will allow imports of fruits and vegetables, and the economic pact with the Palestine Liberation Organization means Palestinians can sell produce in Israel.
Still, Frenkel projects that, because of "staggering" wage agreements in the public sector, real wages will rise 10% in 1994. That, plus housing prices, are key reasons why many experts are not optimistic that the government's 1995 inflation target will be met.JAMES C. COOPER AND KATHLEEN MADIGAN By With Neal Sandler in Jerusalem