Refocus on inflation

Adrian Filut

For the economy as a whole, the macroeconomic consequences of unrestrained inflation are far more devastating than the effects of a low exchange rate.

The failure of the administrative measures taken by the Bank of Israel against foreign speculators, by increasing banks' liquidity and reporting obligations, brings Governor of the Bank of Israel Prof. Stanley Fischer back to the question of what can be done about the strengthening shekel.

The first thing that is clear is what must not be done: stop the interest rate hikes. Even though these help drive the shekel's appreciation, and only widen the interest rate gaps between Israel and developed economies, the Bank of Israel must continue fighting actual inflation, inflation expectations, and inflation of assets, which have been affecting the economy for a long time.

Fischer has already wasted a lot of time, and delayed sharper interest rate hikes, because he tried to use the interest rate tool to deal with both inflation and the exchange rate. This delay cost Fischer the capital market's confidence in the Bank of Israel's ability to restrain the steady rise in prices. Fischer's efforts to split the interest rate and achieve two contradictory targets simultaneously did not work and have already caused damage.

With the latest interest rate hike by 50 basis points, which took the market by surprise, Fischer sought to show that he has returned to making his fight against inflation his priority. By law, this is the Bank of Israel's primary mission, and it must go on. Moreover, Israel's ongoing robust growth makes it possible.

It is important to remember that, for the economy as a whole, the macroeconomic consequences of unrestrained inflation are far more devastating than the effects of a low exchange rate. Nevertheless, the shekel's continuing appreciation affects the competitiveness of Israeli products in the short term, and exports account for half of Israel's GDP. The Bank of Israel should therefore extend the measures it has already taken, or, to apply the old adage: "If force doesn’t work, use more force".

The Bank of Israel should use its big guns. Instead of a 10% liquidity requirement on the banks, it should impose a 40% or 60% requirement, as Brazil has done. There are few alternatives, and the Bank of Israel cannot fight the dollar's weakening in the world.

Fischer should urge Minister of Finance Yuval Steinitz to act and bring forward the cancellation of the tax exemption on nonresidents' profits on makams (short-term Treasury notes). The ludicrous situation in which Fischer imposes restrictions, while Steinitz encourages tax incentives, must stop, and stop now.

Published by Globes [online], Israel business news - www.globes-online.com - on April 4, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

Adrian Filut  illustration: Gil Gibli Anonymous accusations brought Leiderman down

Leo Leiderman is a victim of the most macabre invention in Israeli history: The Committee for the Appointment of Senior Public Officials.

Adrian Filut  illustration: Gil Gibli Far from Chicago

Leo Leiderman understands that extraordinary times call for unconventional methods, but his basic conservatism remians.

Adrian Filut  illustration: Gil Gibli Jacob Frenkel blinks first

The public will not accept that the man who runs the country's monetary policy be a man suspected of financial misdeeds.

Adrian Filut  illustration: Gil Gibli Where exactly will Shelly Yachimovich find NIS 139b?

The Labor Party's economic platform is built on fantasies and ignores the tough questions.

Adrian Filut  illustration: Gil Gibli We'll pay for government complacency

The public should not buy the calming messages and realize that this war will cost a heavy economic price that we will all have to pay.

Adrian Filut  illustration: Gil Gibli Paying for Netanyahu's fiscal sins

Netanyahu who stars in all the surveys as the most successful minister of finance in Israel's history, has as prime minister committed every fiscal sin possible.

Adrian Filut  illustration: Gil Gibli Fischer makes defense budget gaffe

Stanley Fisher arrived unprepared for yesterday's cabinet meeting on the defense budget, and he did not know the material.

Adrian Filut  illustration: Gil Gibli 2013 budget could be cut by default

A simple calculation shows that postponing the budget will prevent an additional NIS 1.1 billion a month, on average, in spending.

Adrian Filut  illustration: Gil Gibli Planned austerity measures not enough

Cancelling exemptions on advanced training funds, VAT on fruits and vegetables, Eilat, and the betterment tax - can generate NIS 6 billion more.

Adrian Filut  illustration: Gil Gibli Taxation in Israel - myths and facts

It is already important to make clear: raising VAT, the main indirect tax, by 1 percentage point is a fait accompli.

Adrian Filut  illustration: Gil Gibli Doubling deficit sends message of weakness

Prof. Omer Moav: Netanyahu lacks the political ability and courage to cut.

Adrian Filut  illustration: Gil Gibli Rothschild and anti-Rothschild

In contrast to the economist-dominated Rothschild Team, the Anti-Rothschild Team is an inter-disciplinary effort of economists, pedagogues, health, welfare and legal experts.

Adrian Filut  illustration: Gil Gibli Unchanged interest rate could prove expensive

There is no solution other than higher interest rates to the problems that the Israeli economy now faces.

Adrian Filut  illustration: Gil Gibli Gas revenues create illusion of Israeli affluence

The government bonus was an April Fool's Joke, but we must make sure that the joke won't be on us.

Adrian Filut  illustration: Gil Gibli Refocus on inflation

For the economy as a whole, the macroeconomic consequences of unrestrained inflation are far more devastating than the effects of a low exchange rate.

Adrian Filut  illustration: Gil Gibli Netanyahu's policies exacerbate inequality

However, Prof. Avi Ben-Bassat says that rising prices are not entirely the government's fault.

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018