Netanyahu should worry about these Bloomberg and Reuters reports
The damage to Israel’s economy by Benjamin Netanyahu’s government went up a notch Tuesday when Foreign Minister Eli Cohen offered some wisdom more typical of Turkey’s Recep Tayyip Erdogan or Donald Trump.
Cohen tweeted that he had asked Finance Minister Bezalel Smotrich to intervene in the central bank’s policy and “halt rate increases.” Cohen is a former economy minister, and in less than a year he’s due to be the energy minister as part of a rotation agreement.
That same day Yair Netanyahu, the prime minister’s son who reportedly takes part in his father’s political decision-making (along with his mother), tweeted that the Shin Bet security service is “part of a coup against the prime minister.” He later deleted the post.
The two tweets provide a very clear picture: an effort to undermine Israel’s security, weaken its democracy and sow doubts about its foundations, while trying to divide the people and stir conflict between various segments of society.
The world’s two most important business news agencies, Reuters and Bloomberg, published Cohen’s statement. In a bullet point at the top of its story, Bloomberg called the move a “rare objection from senior minister to central bank,” adding that it was unclear if Cohen’s comments indicated a fresh approach by Netanyahu and his new hard-right government.
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Bloomberg noted how the government was already striving to weaken the judiciary, in part by interfering in the selection of judges, setting off a great public protest.
As Reuters quoted Cohen, “In the context of moderating inflation, there was no justification for today’s interest rate hike.” It noted, however, that inflation had reached a 14-year high in January at 5.4 percent, provoking the Bank of Israel to raise its interest rate by half a point to 4.25 percent. The bank’s deputy governor, Andrew Abir, told Reuters that more increases were likely in the effort to curb inflation.
Responsible adult
Why should we give these Bloomberg and Reuters reports a close reading? Because investors around the world do. And they see Israel’s government taking a step that only authoritarian leaders take, at the cost of great damage to their currencies and economies. The government is challenging the central bank’s independence. Cohen’s statement points to a dangerous assault that has worrisome precedents around the world.
A central bank’s independence is a basic feature of a healthy economy, a source of confidence. Since the 1970s and ’80s, during which central banks played key roles in curbing inflation, their independence has been considered the best way for maintaining price stability. Unlike governments, these institutions aren’t keen to keep interest rates low because of a country’s large debts or looming elections.
Central banks’ growing influence since the 2008 financial crisis has increased their exposure to politicians trying to boost their popularity. Politicians badger central banks to release funds to stoke an economy, or to the chagrin of the government, they might raise rates and burden consumers such as homeowners paying off mortgages. That’s what’s happening now in Israel and across most of the world to reduce a dangerous bout of inflation.
When President Erdogan launched a campaign to end his central bank’s independence, investors sent the Turkish lira down to record lows. Erdogan is one of the models that Israel’s government may be emulating: He changed the constitution to prolong his term, suppressed the opposition, eviscerated the courts, fired central bank governors, appointed his son-in-law as finance minister and gradually made Turkey a pariah among investors.
Turkey’s economic backwardness is weighing heavily after the earthquake this month and in the run-up to this spring’s general election. But Erdogan’s power has swelled since he took apart institutions designed to provide checks and balances, so the chances are slim that Turkey can achieve a peaceful change of government.
Another leader who came out against his country’s central bank is Argentina’s Mauricio Macri. The already weak peso fell even more. Macri then lost an election.
More prominent was U.S. President Trump’s 2018 assault on high interest rates and the Federal Reserve governor he had appointed. He sent out his media adviser Larry Kudlow with the message that the Fed under its new leader realized that more employment and growth don’t lead to inflation.
This message sounds more veiled than that of Cohen in Israel, but Kudlow meant exactly the same thing. According to some media reports, Trump considered firing Fed Chairman Jerome Powell later that year. Of course, Trump lost the election in 2020.
Shaky shekel
The shekel is already under pressure. The dollar crossed the 3.6-shekel mark on Wednesday, rising 2.9 percent against the Israeli currency this month. In comparison, since early February, the dollar rose 1.8 percent against a basket of six major currencies.
Short-term currency fluctuations are much more affected by central bank policies, especially the Fed, whose signals about further interest-rate increases have strengthened the dollar. In recent months the dollar weakened in expectation that rates would come down. But in the long term, government policy and confidence in the central bank are critical factors in winning investor confidence.
The bitter irony is that supporters of Israel’s government blame opponents of the judicial revolution for causing alarm, while actually it’s the government that’s subverting the economy. The Bank of Israel’s decision to raise rates by half a percentage point and not a quarter, as the Fed did, shows that its leaders realize that the shekel is under siege. The foreign minister may turn out to be the person who led the assault on the shekel.
An associate of the foreign minister said: “Cohen, who worked for an international rating agency, supports the central bank’s independence, so attempts to attribute to him words he didn’t say are a distortion.
“Cohen definitely believes that additional tools should be employed to curb inflation, not exclusively the tool of interest rates, such as a tax cut that would reduce prices [value added tax]. The minister and bank governor will find other ways, not just the draconian tool of manipulating interest rates.”