Interviewed by "Globes," Bank of Israel Governor Prof. Amir Yaron explained the Monetary Committee (which he heads) decision to keep the interest rate unchanged at 4.75%.
He said, "We should not be dazzled by the index (Consumer Price Index) of 3.3% and we know that we will be closer to 4% after the next index. But we do see that the process of expectations is leading us to enter the target range (annual inflation between 1% and 3%) in the first quarter of 2024. That's why we decided at the moment to leave the interest rate unchanged because it (inflation) is indeed falling and we are always looking for this balance - first of all to return inflation to the target range and minimizing the potential damage to the economy."
You returned last week from the Jackson Hole conference on central bank policies. What did you hear from your counterparts in the world and the economists you met with about the Israeli economy and what is happening in Israel?
"Most of the conference focused on the issue of reforms and the like. Of course, (US Fed chair) Powell's speech was very important and so was Lagarde's (European Central Bank president) regarding the issue of the importance of returning to the 2% inflation target and the fact that there is inflation in the world that results from disruptions on the supply side. Regarding Israel, economists are asking and trying to understand more about what It is going to happen here and of course it is very difficult to give accurate predictions.
Uncertainty surrounding the end of Yaron's term
The current interest rate decision may be one of the last by Yaron as Governor of the Bank of Israel. Yaron's five-year term will come to an end in December, and now Yaron, as well as the prime minister and the finance minister must decide about extending the term. Yaron will announce his decision over the next month and reports, including in "Globes," suggest he will not seek a second five-year term and candidates to replace him are already being sought.
Investors are very concerned about this uncertainty and Yaron strives to soothe. "I have been in office for nearly five years as governor," he said, "One of the most challenging times Israel has known. Five elections, a worldwide pandemic, a war in Europe and global inflation, and now also a social rift due to the constitutional changes. I repeat what I said before and I intend to dedicate the holidays to a decision on my future path. There are quite a few challenges on the agenda. The work is not yet finished."
Shekel depreciation is a concern
Although the Bank of Israel points out that the current interest rate can curb inflation, there is one factor that is considered a major source of concern: the forex market. Over the last month, the shekel-dollar exchange rate has been traded around NIS 3.8/$ with the Israeli currency at its weakest since March 2020. If the depreciation of the shekel continues, the Bank of Israel warns that it could lead to further interest rate hikes. "The depreciation of the shekel in recent months contributes to the increase in the rate of inflation and its development in the coming months will have an impact on inflation dynamics," the Bank of Israel Monetary Committee wrote.
Yaron admits that this is a significant risk: "There is no doubt that since the start of the year, the shekel has disconnected from the close connection it had with the financial markets abroad, and we see an excess depreciation of over 10%, which translates into excess inflation of 1.5%."
Yaron attributes the changes in the shekel exchange rate to the judicial reform: "It (the shekel) reflects the uncertainty that has grown in the economy and the risk premium that arises from the constitutional processes."
Yaron insists the Bank of Israel is not currently considering intervention in the foreign exchange market to balance the shekel losses in the market, but defines the limits of the sector for this type of action: "So far we have not seen any market failures despite the great volatility in the foreign exchange market, the market is working and our approach is to let the market find pricing given the uncertainty and risks that have been added to the economy. If we see market failures or extreme conduct, we have the tools to deal with it."
Worldwide core inflation remains sticky
Yaron also spoke about the situation in the global economy. "The inflation environment in the world is moderating in a significant number of countries, but still remains above the targets of the central banks, while core inflation remains stickier." He adds that the monetary tightening in the world continues and the markets are pricing in a certain probability of an interest rate hike by the ECB and, to a lesser extent, by the US Fed as well. In the US annual inflation is at a lower level than in Israel - only 3.2%.
In the Eurozone, annual inflation is higher at 5.3%. Apart from that, in the US market it is estimated with a probability of over 90% that the interest rate will not be increased at the end of the month and the US market is already beginning to assess the start of interest rate cuts.
The Bank of Israel Governor was asked about the reprimand he gave the banks about their high profitability, which led them to grant benefits to customers on interest on current accounts and deposits, but in the end, the public did not receive any significant benefit. "It is important to remember that we are in a long process of reforms in the banking sector and it takes time to mature. The power in the hands of the customer has increased significantly in recent years. The quantity, quality and accessibility of the public to information in the field of credit, interest rates and deposits has also increased and the ability to move from bank to bank. We are promoting the connection of the fintech companies to the Bank of Israel systems, to the credit data system, and some of the steps have already matured. This is the way to promote competition. The banks have taken some steps for the benefit of the customers, but of course we always want to see more."
Yaron also referred to the relatively insignificant increase in the expenses for credit losses made by the banks in the last quarter, following another meeting to which they were summoned, this time by the Supervisor of Banks. That meeting was first revealed by Globes. The Governor was asked whether the banks were being cautious enough, in light of the increase in the number of small businesses facing bankruptcy or insolvency.
He said, "We are of course monitoring this issue and see a certain, slight increase in the issue of arrears and in the issue of appeals to the official receiver. The banks did increase collective provisions substantially and the cushions they have are certainly sufficient as we see the developments in the economy. The banking system is stable, which is a good thing, and we've seen what happens in economies where the system is unstable."
Published by Globes, Israel business news - en.globes.co.il - on September 4, 2023.
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