Governor of the Bank of Israel Stanley Fischer took part in a Knesset Finance Committee session today on monetary policy. Fischer told the committee, “We, as a central bank, always stress the importance of exports to the economy. But the exporters must adapt their activity to the current reality, in which it is impossible to prevent market forces from having their effect on the exchange rate. Everyone, including the exporters, have to understand that the central bank cannot hold out forever against the market and win.” Fischer was asked by committee members about the risks of holding such high foreign currency reserves. “Holding the reserves has a cost, but there is also an advantage and a gain. A country with large reserves can regard what happens overseas with greater security,” he replied.
”If, God forbid, there should be a need for the State of Israel to raise capital, we have the means. In this crisis, countries that had large reserves and had problems, Russia is a good example, were able to deal with their problems easily in comparison with countries with lower reserves. At this stage, there is no cost to holding the reserves because the interest we pay to finance the purchase is very close to zero.”
Fischer added, “I sleep better at night with the current situation than with what it was previously, but clearly we cannot continue buying foreign currency for ever.”
On taxation of movement of speculative capital, which the Tax Authority has been examining, he said, “Almost every country has abandoned the idea. Even Chile, which succeeded at first, has given it up. You encourage companies to find ways of avoiding the tax and the regulation, and that only makes life more complicated.”
The committee members expressed concern about inflation rearing its head. “Our goal is to return to am inflation target of 2% within a year, and we will be ready to act to achieve that,” Fischer said. “They told me my policy was inflationary, and I said that we expect that unless we take these steps, inflation will be negative. The result was that inflation rose above the target.” He added that there was a close connection between inflation and the exchange rate. Today, the connection is weaker, but it did not disappear the moment that apartment prices began to be quoted in shekels rather than dollars. The governor said that appreciation of the currency would lower inflation, but that there were other consequences.
On the state of the economy, Fischer said, “We don’t have sufficient data to say that we have passed the peak of the recession, but it is clear that we are close to it if there are no surprises in the near future.” He noted that the stock market had strengthened. “When the banks give zero interest, people look for other places to invest, and go back to the stock exchange. The aim of our very low interest rate policy was to encourage demand in the economy, and it did. That’s how it works.”
In response to a comment that the virtually zero interest rate was creating a real estate bubble like that which arose in the US, Fischer said, ”We are not in the position of the US, where people did not have money to pay their mortgages. The banks were only interested in selling the mortgage, and after that they sold the risk via securitization. Here it’s different, because the risk stays with the bank.”
Published by Globes [online], Israel business news - www.globes.co.il - on August 5, 2009
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