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Viewing cable 04TELAVIV2384, Israeli Economic News: Klein Puts Cuts on Hold;

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Reference ID Created Released Classification Origin
04TELAVIV2384 2004-04-26 14:49 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Tel Aviv
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 TEL AVIV 002384 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN IS ECONOMY AND FINANCE
SUBJECT: Israeli Economic News: Klein Puts Cuts on Hold; 
Cabinet Oks Netanyahu Tax Reductions; BOI Upgrades Growth 
Estimates 
 
 
This cable is classified Sensitive but Unclassified.  Please 
handle accordingly. 
 
------- 
Summary 
------- 
 
1. (U) On Sunday, April 25, the Bank of Israel announced 
that there would be no change in interest rates in May, 
leaving the BOI rate unchanged at 4.1 percent.  On the same 
day, the GOI approved Finance Minister Netanyahu's plan for 
reducing taxes announced earlier in the month. The cuts 
include reductions in income taxes as well as a gradual 
reduction in corporate taxes from 36 percent to 30 percent 
by 2007.  Meanwhile, the BOI Research Department Chief, 
Karnit Flug, says Israeli growth will reach 3.4% in 2004. 
End Summary. 
 
--------------------------- 
Pause in Interest Rate Cuts 
--------------------------- 
 
2. (U) After 13 consecutive monthly interest rate declines, 
the Bank of Israel announced on April 25 that interest rates 
will remain unchanged at 4.1 percent.  In a very carefully 
crafted press release, the Central Bank listed a number of 
reasons for not continuing its program of interest rate 
reductions: 
 
- the shekel has experienced a 4 percent cumulative 
depreciation since the beginning of 2004; 
 
- the money supply has increased 8 percent in the first four 
months of this year, directly related to the decrease in 
interest rates; 
 
- Government bonds yields have slowly begun to rise. 
 
The BOI also stressed its adherence to price stability as a 
chief aim, and stated that, as there is now an increase in 
inflation expectations, it will review its monthly interest- 
rate policy in order to maintain price stability within the 
government's 1 - 3 percent framework. 
 
------------------------------ 
BOI May Cut Further If... 
------------------------- 
 
3. (U) The BOI in its press statement indicated that if 
inflation remains in the price stability range and the 
financial markets remain calm there could be a continuation 
of interest rate cuts dependent on certain conditions.  This 
would depend on whether there would be an increase in 
capital inflows relative to outflows, thus strengthening the 
shekel. 
 
4. (SBU) In a veiled slap at the Ministry of Finance, the 
Bank noted that more attention needed to be paid to reducing 
Israel's high debt burden, which reached 105 percent in 
2003.  As the BOI press release explained, reducing the debt 
burden would reduce long-term rates, which would in turn 
allow for short-term rates to be lowered. 
 
----------------------------------- 
Government Goes for Bibi's Tax Cuts 
----------------------------------- 
 
5. (U) On Sunday, April 25, the Cabinet approved Finance 
Minister Netanyahu's proposed tax reductions for low and 
middle-income earners, as well as a gradual reduction in 
corporate taxes from 36 percent to 30 percent.  Draft 
legislation will be presented to the Minister's Committee 
for legislation next week.  These changes will require 
Knesset approval, and if all goes according to schedule, 
would go into effect on July 1.  Finance Minister Netanyahu 
announced the proposed tax cuts originally on April 4, 2004 
on the eve of the Passover holiday.  The MOF stated in its 
press release that the reductions were intended to reduce 
income distribution gaps, encourage employment and 
investment, and assist acceleration of growth. 
 
------------------------------------------- 
BOI optimistic about 2004 economic prospects 
-------------------------------------------- 
 
6. (U) On April 22, Karnit Flug, Head of the Research 
Department of the Bank of Israel, expressed newfound 
optimism in a news conference about the Israeli economy, 
with forecasts exceeding those of the Ministry of Finance. 
Flug attributed the turnaround to the global recovery, to an 
improvement in the security situation, and to the GOI's 
fiscal and monetary policy. 
 
7.  (U) Flug presented the updated BOI 2004 forecasts as 
follows: 
 
                      Updated      Previous 
GDP                   3.4            2.4 
Business GDP          5.2            3.7 
Private Consumpt.     4.0            2.8 
Public consumpt.     -2.5           -2.5 
Exports               7.8            5.5 
Civilian imports      8.4            6.7 
Investment in fixed   3.5            2.0 
   assets 
 
 
Kurtzer