Download The Governor of the Bank of Israel spoke today at the Herzliya

BANK OF ISRAEL
Office of the Spokesperson and Economic Information
1 February, 2012
Press Release:
Abstract of remarks today by the Governor of the Bank of Israel at the Herzliya
Conference
The Governor of the Bank of Israel spoke today at the Herzliya Conference. The
following is a summary of his remarks.
In opening, I would like to speak about the state of the global economy. A week ago,
the IMF revised its forecasts for world economic growth in 2012, and all its forecasts
were revised downward, except for its forecast for growth in the USt, which didn’t
change. Global growth is expected to be 3.3 percent, and I recall that in the past, when
I worked at the IMF, we tended to define a global growth rate of 3.5 percent as the
boundary between recession and normal growth. I will point out as well the decline in
the forecast growth in the eurozone, from 1.1 percent to negative 0.5 percent, and the
decline in expected growth of world trade—to which Israeli exports are very
sensitive—from 5.8 percent to 3.8 percent. It is very difficult for us to predict what
will occur in a financial crisis scenario, should it come about. There are various
possibilities. The positive aspect in that is that even European countries have realized
that there is no certainty regarding expected events in the case of the departure,
voluntary or forced, of a country or countries from the euro bloc, and so they have
bolstered their efforts to find a solution to the problem. As a result, and as a result of
efforts by the ECB and the monetary tools it is using, the probability of a crisis in the
eurozone, which at the IMF meeting in October I felt was quite high, has decreased.
However, despite the uncertainty regarding how a crisis would come about, if it does
come about, it is clear to us that in Israel it will be characterized by a sharp negative
impact on exports. In that regard, I was pleased to hear the Director General of the
Ministry of Industry, Labor and Trade, who spoke before me, and who reported
progress in the signing of trade agreements with emerging markets. With that, the
decline in exports can already be seen.
The Bank of Israel has begun to respond through monetary policy, and reduced the
interest rate three times in recent months. We have so far held off saying what we said
when we began a path of interest rate increases in September 2009, when we spoke of
a framework of returning the interest rate to a normal level. Currently we are not
saying that—we are struggling, as mentioned, to assess what will happen in Europe,
and so we cannot speak of a clear path for the interest rate. In any case, we have
begun to reach decisions in the framework of the new Monetary Committee, and to
date the experience has been excellent and the level of discussion has improved
greatly.
Professor Rafi Melnick, a member of the Monetary Committee who also spoke before
me, mentioned that financial markets are prepared to accept the fact that the deficit
increased in the framework of the operation of automatic stabilizers. I agree with him,
and I am sure that markets will not welcome an extraordinary increase in the deficit,
such as, for example, in the framework of conducting election economics. In any case,
I praise my colleagues at the Ministry of Finance on the manner in which they
scrupulously maintain the fiscal framework.
Yossi Bachar spoke here and passed on a message regarding an increase in capital
adequacy. There is no doubt that we must increase the capital adequacy ratio in the
banking system, and we are aware of the problem that will be caused if we impose
limitations on banks which will make it difficult to extend credit, and we take it into
consideration. Beyond that, there is a problem in non-bank credit too, which
comprises about half of the credit to the business sector. In the previous crisis, the
Israel Securities Authority was concerned by the lack of a mechanism which would
allow companies to reach a debt settlement, and came up with credit officers. The
innovation was so successful that unfortunately, there are now companies that reach
debt settlements even when there is no need for it.
In the housing market, we see some calm, and I was pleased to hear forecasts here of
prices continuing to decline, though moderately. There are those who claim that the
increase in prices was a result of the reduction in the interest rate, and they wonder if
we aren't concerned that the current interest rate reduction will again accelerate the
increase in housing prices. The answer is no—the fact that the Bank of Israel limited
the share of a mortgage that can be taken at floating rate has reduced, in our
assessment, the transmission between the Bank of Israel interest rate and the effective
interest rate on mortgages and housing prices.
Looking at short terms variables, then, we have a strong, flexible, and steadfast
economy. Since I became governor of the Bank of Israel, the economy has
experienced very significant stress tests, and was nearly unscathed. The economic
policy framework is strong, and people in Israel have a lot of experience in dealing
with tough problems, experience which helps in dealing with problems when they
arise. If there will be a financial crisis in Europe, it will have a negative impact on us,
but I believe that we will be able to deal with it.
From the perspective of long term variables, we are dealing with tough problems in
the area of the increase in the scope of poverty. Figures show, not surprisingly, that
poverty is prevalent among large families, with the probability of poverty being
greater if two parents are not working, and that poverty declines with an increase in
education. Figures also indicate very large—and growing—prevalence of poverty
among the Arab and ultra-Orthodox populations. Poverty among those populations is
considerable because of the low rate of participation in the workforce by those
populations, and I believe that that this situation is not sustainable. The situation is
especially worrying when looking at demographic trends: the rate of increase of the
Arab and ultra-Orthodox populations is much higher than the Jewish, non-ultraOrthodox, population, and the share of these populations in the general population is
increasing. Among Arabs, we see some decline in the rate of growth of the
population, but among ultra-Orthodox it is actually the opposite. I would like to point
out that I very much respect the ultra-Orthodox population, but I must say that a
continued increase in the share of the population which does not participate in the
workforce cannot continue forever, and so will have to stop. We see positive trends—
we see, for example, a change among the ultra-Orthodox, which can be seen in the
fact that today there already are 6,000 ultra-Orthodox students in colleges. In the Arab
sector, there is a trend of establishing independent businesses, even without
government aid.
In the long term, we obviously must deal with the problem of the Israeli-Arab
conflict, and the need to reach a peace agreement. In my view, the Israeli economy is
a sort of miracle, and we have very talented people. If we succeed in resolving the
problems of relations with our neighbors too, we will be able to achieve the growth,
prosperity, and standard of living which we deserve.