Israel's cenbank chief warns lawmakers not to interfere with independence

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Finance committee head criticised rate rises

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Trust can be lost in "blink of an eye" - governor

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Deputy governor signalled more rate rises likely

By Steven Scheer

TEL AVIV, Nov 29 (Reuters) - Bank of Israel Governor Amir Yaron on Tuesday warned lawmakers not to interfere with monetary policy decisions, and said the "magic solutions" they proposed to blunt the impact of interest rate hikes would hurt the weakest sectors of the economy.

Yaron's comments appeared to be a response to the head of the Israeli parliament's powerful finance committee, Moshe Gafni, who on Monday criticised a wave of central bank interest hikes and proposed legislation to shield mortgages from rate increases.

Speaking at the central bank's own conference, Yaron defended the aggressive rate hikes over the past seven months to battle rising inflation and said any legislation to get around the higher rates would create risks for banks.

He noted that such moves could miss their target and create uncertainty, harming the entry of new players, the development of advanced products, and Israel's image as an advanced and free economy.

"We should not disregard this or allow steps that will harm this," Yaron said. "Nor should we take for granted the confidence of the markets ... in the Israeli economy.

"Countries where the political echelon compromised the independence of the central bank discovered that the trust of the markets and international institutions is earned through hard and strenuous work over decades, but it can be lost in the blink of an eye."

Gafni seemed determined to press on, saying at the start of the Tuesday's finance committee meeting: "I do not intend to drop this matter."

Gafni's committee controls the government's finances and can block the state's budget.

In a bid to fight rising inflation that has topped a rate of 5%, the Bank of Israel last week raised its benchmark interest rate by a half-point to an 11-year high of 3.25%. It was the sixth increase in an aggressive monetary tightening cycle that has taken the rate from 0.1% in April.

With mortgages in Israel linked to both inflation and interest rates, such loans have soared more than 1,000 shekels ($292) a month in many cases and added to the country's already high cost of living.

Yaron said he was determined to return inflation to its 1%-3% annual target and that inflation harms the weakest sector most, and as such, rate hikes are aimed at preventing pain in the future.

"Those who do not understand this and try to find magic solutions first and foremost may actually hurt the weaker strata," he said.

Deputy Bank of Israel Governor Andrew Abir told Reuters last week that the benchmark rate would probably exceed 3.5%, meaning at least one or two more rises are likely in early 2023. ($1 = 3.4285 shekels) (Reporting by Steven Scheer; Editing by Alison Williams)