"This is a highly symbolic period for the Bank of Israel Monetary Committee," says Deputy Governor of the Bank of Israel Andrew Abir, who heads the bank's Market Operations Department, in an interview with "Globes" after the latest interest rate announcement. "We are ending the bond purchasing program that we ran in order to help the Israeli economy deal with the coronavirus pandemic, and with the perspective of eighteen months' hindsight we can look on that program with pride."
The Bank of Israel left its key interest rate unchanged on Monday, as expected, and it will end the bond purchasing program in December, marking the beginning of the moderation of its ultra-expansionary policy. At the same time, the Bank of Israel is leaving open the possibility of its expansionary policy continuing, despite the fact that conditions in the economy have improved since the onset of the crisis, while the shekel has strengthened more sharply than any other currency over the past year.
"We exited the coronavirus crisis with high growth figures in comparison with other Western countries. Looking at other countries, we are in a luxury position on inflation," says Abir. "There are countries in which inflation is running higher than the target rate, and here we have high growth, and employment that has not yet returned to pre-crisis levels, but the fact is that inflation is low here while other countries are having to deal with inflation much higher than their targets and have already raised interest rates."
"Inflation seen falling within a year"
"We are keeping one eye trained on inflation," says Abir, who adds that the bank expects a decline in inflation within a year, as some of its causes are technical. "We don't see prices in the energy market continuing to rise in the coming year, so the effect of the energy market will drop out of the indices. The supply chain difficulties around the world can also be expected to improve, although that will take longer than we thought. We will gradually see that situation easing. Exporters' raw material costs will fall, as will shipping costs. What's true is that world trade has recovered well since the crisis, there's no problem of demand in the world, rather the difficulty is to supply the demand, and that's good news for our exporters."
"Exchange rate policy - an achievement"
Has something changed since the Governor of the Bank of Israel declared the end of the purchasing program? After all, the bank has gone back to intervening.
"Looking back on the past decade, the foreign currency purchases enabled the economy to cope with the appreciation of the shekel. The appreciation was gradual and not at one blow, amid full employment for most of the time. I think that that's an achievement for our exchange rate policy. As far as the foreign currency purchasing program that we announced in January 2021 is concerned, that's an exceptional program for exceptional times, but the governor also stated that it was not the end of the use of the tool of intervention in the foreign exchange market. It's no secret that were active in the market last month. I can't say to what extent, but you'll see it in the next reserves report.
"Hedging by financial institutions was a substantial factor behind the appreciation, the result of sharp rises in the equities market in 2021. The S&P 500 rose by 30% in a year, and that made the institutions raise their hedging. As for the future, it's hard to imagine the markets again rising 30% as they have in the past year, and so we don’t expect demand for shekels on the part of the institutions in the coming year. We'll be active in the market if we think that there are exchange rates that don't suit the economy, and that's not something that we examine in one day or one week but over time, because in the end what's important is not the exchange rate on December 31 but in the coming year or years, and so there's no need to get excited over the change in a single month; we have a longer term perspective."
To what extent does interest rate policy affect the exchange rate in your view?
"Interest rate changes certainly have a place in the considerations of foreign exchange market players, but our interest rate is lower than the rate in the US, so I don't think that the interest rate is a problem when we look at the flows in the foreign currency market. These mostly stem from factors such as the financial institutions, capital inflows to technology companies, or the current account surplus."
What gives you more sleepless nights, the employment market as in the past, or inflation?
"Our two main targets are inflation, to ensure that it is within the target range, and to maintain growth in the economy. We look at the labor market and estimate that 150,000 jobs are lacking to return to full employment. We see no reason that we shouldn't get back there. If, in order to return to that level, we have to continue with our expansionary monetary policy, we can do that.
"One of the reasons that we can do it is our low inflation rate relative to other countries. We're not in the situation of countries like Poland and the Czech Republic which have inflation rates of 5-6%, and so have already started raising interest rates. Our inflation rate is within the target range, and when you look at the expectations, and according to our Research Department as well, we see inflation in Israel falling next year. That therefore allows us to be more patient with our monetary policy, to continue with our very expansionary policy. Long-term real interest rates in Israel are also low, so at least on inflation the Monetary Committee's considerations are easier. We don’t have the dilemma of the US of supporting employment with inflation at 6%."
In the past, the bank talked about dynamic exchange rate management. Have conditions changed in that respect? Perhaps because the strong shekel acts as a damper on inflation?
"It's not a matter of damping inflation. We don't have to be like other countries, and that allows us to focus on growth. And that's true of the foreign exchange market as well. Our policy is more directed towards employment than inflation, because of the low inflation figures. We're not excited about the October Consumer Price Index reading, because we think that the forces in the big picture will bring about moderation in 2022. We won’t see the price rises we have seen in 2021 continuing. The high inflation figures that stemmed from energy prices are no longer in the index, and the difficulties in the global exports chain will gradually be solved and we'll see less pressure from that direction."
Where do we need to keep a finger on the pulse
"On wage agreements. For the time being, the Histadrut's agreement with the employers has provided certainty in that area. We are certainly looking at developments in wages and inflationary pressures."
Published by Globes, Israel business news - en.globes.co.il - on November 24, 2021.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2021.