Interest Rates Continue to Rise As Confidence in Government Fades

Interest rates soared as foreign currency purchases continued at a record pace Thursday, while confusion reigned over the monetary policies of the new government.

The situation developed after the surprise 5 percent devaluation of the shekel on Tuesday.

Confidence in the government faded when contrary to initial reports, the devaluation turned out to be an ad hoc move by Bank of Israel Governor Michael Bruno, and not part of a comprehensive economic program introduced by the new finance minister, Shimon Peres.

Bruno acted — with the apparently hasty approval of Peres — to stem the rush on foreign currency, spurred by expectations of a major devaluation.

But the fact that the change was only a modest one generated fear that a further devaluation was imminent. The public has purchased a record $330 million in the past three days.

The idea is to accumulate dollars before they become more expensive. But Bruno decided against another devaluation when arithmetic showed Thursday’s dollar purchases did not exceed Wednesday’s. They amounted to $70 million on both days.

The central bank was also busy denying a Israel Radio report Thursday morning that Bruno was about to revalue the shekel. That was followed by another erroneous report of a Thursday devaluation.

The overall impression here is that the people in charge of the Treasury and banking system are not quite sure what they are doing or what needs to be done.

Meanwhile the private sector, seeking bank loans to purchase dollars, is driving interest rates to record heights.

The current rate is 48.25 percent, up 16 percent from last month and more than triple the rate of six months ago.

But the central bank will not intervene to bring rates down. The high cost of loans is expected to put a damper on dollar purchases.

Israel’s foreign currency reserves stood at $3.7 billion Thursday, closer to the $3 billion danger point than it has been for some time.