ISRAEL - March 17 - Govt. To Set Up Council To Determine Monetary Policy.

Seventeen ministers vote in favour of a plan to establish a 7-member council to determine monetary policy, with Finance Ministry Director-General Ohad Marani saying: "This will strengthen the economy of Israel. This will strengthen the independence of the Bank of Israel. Now there will be a broad committee making interest rate decisions; no more will it be a one-man decision". The Finance Ministry will appoint a special committee to search for candidates for the new monetary panel. The Bank of Israel Governor David Klein will not have any veto power over board appointees. (Under the present system, the governor of the Bank of Israel sets the benchmark lending rate each month after meeting with advisers. The government's move comes less that a month after Klein's raised interest rates during the worst economic slump in 50 years, a decision criticised by Finance Minister Silvan Shalom).

Analysts say the plan will weaken the Bank of Israel, create financial instability and move the Central Bank's mandate away from keeping inflation low. Augusto Lopez-Claros, international economist at Lehman Brothers, said: "Shifting the policy focus to undermining Central Bank independence is not likely to enhance the credibility of the government". Shlomo Attiah, an analyst at Ilanot Batucha Securities, said: "This is not good for the economy. It's really a power struggle between Shalom and Klein". Shalom insisted there was no power struggle and despite his attacks on Klein's policies, he said: "It's not personal". For his part, Klein declined to get into a public war of words with Shalom. The Bank of Israel issued a short statement saying it was studying the proposal. But last week, Klein expressed dissatisfaction, saying there was no clear commitment by the government to price stability. Initial proposals wanted equal attention to be paid to keeping inflation low and promoting economic growth and employment. The Bank of Israel said such a change in mandate would have led to many conflicts, citing the current environment in which fears of an inflation spike led Klein to raise rates despite an economic downturn and unemployment above 10%.