Monetary Policy and Financial Stability Policies in Israel

1
Monetary Policy and Financial Stability Policies
in Israel

• Presented at Economic Dialogue Meeting
• byDr. Edward Offenbacher
• Director, Monetary/Finance Division, Research
  Dept.
• Bank Of Israel
• January 2012

2
Outline of Presentation

• Key Macroeconomic Developments
• Issues for Monetary Policy
• Issues for Financial Stability

3
Key Macroeconomic Developments

• Slowdown of real growth after seven good years
  of export-led growth
• Low unemployment but moderate wage increase.
• BoP CA deficit due mainly to ToT hit.
• Inflation moderating after target misses.
• House price inflation.
• Fiscal policy Expenditures within target path
  despite pressures from defense, social justice
  tax receipts slowing due to growth slowdown so
  deficit missing target.
• Monetary policy Tension between domestic vs.
  foreign pressures.

4
Issues for Monetary Policy

• Growth slowdown w/ economy near full employment
  weak demand side or supply constraints? Where is
  relevant potential output?
• Slowing inflation one-time effects or indicator
  of recession ahead? Why is wage growth subdued?
• Interest rate differentials Potential for
  capital inflow, local currency appreciation (on
  hold recently).
• Complaints of credit crunch how legitimate?

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Financial Stability Policy Issues (1)

• Financial stability policy (aka Macroprudential
  Policy) Do we know what it is? Do we have
  relevant information and analysis in the
  profession, in Israel? Contagion/network effects
  credibility/confidence.
• Key measues taken in Israel (a) Capital
  surcharge on high LTV mortgages (b) Limits on
  variable rate mortgages (c) Reporting/reserve
  requirements on foreign activity in Makam and
  derivatives (d) Elimination of tax exemption for
  foreigners on Makam interest.
• Key new measure adoption of Basel III Tier 1
  capital adequacy requirements for banks.

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Financial Stability Issues (2)

• Imported issues
• European crisis direct (financial) and indirect
  (trade) exposures
• Geopolitical Arab spring, Iran
• U.S. Looking better for now, but
• Home-made issues
• Highly leveraged conglomerates
• House price inflation
• Construction industry loans

7
Thanks
8
GDP Growth Rates in Israel and in the Advanced
Economies(2000-2011)

-The Quarterly data show the seasonally adjusted
rate of change from the previous quarter at an
annualized rate. -The growth rate for the
advanced OECD economies (excluding Luxembourg and
Iceland) is a simple average of their
individual growth rates. SOURCE OECD Data and
the Bank of Israel
8
9
Israels Annual GDP Growth Rates (2000 2012F)

9
Bank of Israel forecasts for 2012
10
Goods imports and exports(20002011)
millions
Goods Exports
Goods Imports
Monthly figures, million, at current prices.
Imports and exports excluding airplanes, ships
and diamonds. SOURCE Bank of Israel.
10
11
Main labor market Indicators (Quarterly data,
seasonally adujsted,1997-2011)

57.4
5.6
11
SOURCE Based on Central Bureau of Statistics
Labour Force Survey.
12
Real Wage per Employee Post (1999-2011)
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Seasonally adjusted, 3 months moving average.
2004 prices.
SOURCE Based on Central Bureau of Statistics
Data.
13
Current Account of Balance of Payments(Percentage
of GDP, 1995-2011)

13
SOURCE Balance of Payments, Central Bureau of
Statistics.
14
Budget Deficit (Percent of GDP, 2000-2012)

14
Percent of GDP excluding credit extended. The
data refers to the deficit excluding the Bank of
Israels profits. 2011 and 2012 Budget deficit
is based on the current budget and BOI forecast.
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Gross Public Debt(Percent of GDP, 2000-2012F)

16
Bank of Israel forecast
17
The Tax Burden in Israel and in the OECD
Countries (Percent of GDP, 2010)

Including income tax, social security tax,
fees, levies and fines, Including consumption
taxes, levies on specific goods services and
valued added taxes. SOURCE OECD data
17
18
The Bank of Israel Interest Rate, Actual
Inflation, and Inflation Expectations
(200412)

Inflation expectations
In the previous twelve months. Twelve
months forward, calculated form the capital
market. SOURCE Bank of Israel.
18
19
Inflation Over Past 12 Months, Inflation Targets
and Inflation Expectations from the Capital
Market (1997-2011)

Consumer price index
Inflation expectations
19
SOURCE Research Department, Bank of Israel
20
10 Year Break-Even Inflation Expectations
(2001-2012)
20
10 years average Inflation Expectation. SOURCE
Research Department, Bank of Israel
21
The Nominal and the Real Exchange
Rates(1997-2012)
NIS
3.8
Shekel / Dollar Exchange Rate
Index
The Real Exchange Rate by Trading Partners
(10001/1997)
111.8

• A rise in the index indicates depreciation.
• The figure for the last month is calculated from
  spot exchange rates known for the half-month, our
  forecast CPI from the monthly model, and an
  extrapolation of inflation in the countries whose
  currencies are in the currency basket.
• SOURCE IFS and Bank of Israel

21

• The NIS/ chart is on a daily basis, while the
  real exchange rate chart is on a monthly basis.

22
10 Year Israel-US Gov. Bond Spread and EMBI
Index (Basis points 2006-2012,)
EMBI
Israel-USA Government Bonds 10 Years Spread
22
The EMBI tracks total return for traded external
debt instruments in the emerging markets. The
EMBI expands upon the original EMBI index which
covered only Brady Bonds. SOURCE Bank of Israel
23
The Stock Markets Israel, NASDAQ and the
Emerging Markets (1/6/2006100)
Index
Emerging Markets
NASDAQ
Israel (Tel Aviv 100)
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SOURCE Bloomberg
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Credit Balances Outstanding(2006-2011, NIS
Billion)
25
Credit from the Banking Sector(2006-2011, NIS
Billion)
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Credit to the Business Sector(2006-2011, NIS
Billion)
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