BoI Governor confident of taming inflation

Bank of Israel Governor Prof. Amir Yaron credit: Eyal Izhar, Tali Bogdansky
Bank of Israel Governor Prof. Amir Yaron credit: Eyal Izhar, Tali Bogdansky

Prof. Amir Yaron tells "Globes" that rate hikes are painful but that if inflation is not eliminated there will be greater pain.

This afternoon the Bank of Israel hiked the interest rate by 0.5%, for the eighth consecutive time, to 4.25%, above the forecast that its research department presented only six weeks ago. It is already clear that this will not be the last interest rate increase. Governor of the Bank of Israel Prof. Amir Yaron told "Globes" that despite understanding that every rate hike increases the economic burden on citizens, especially mortgage takers, "It is impossible to lower inflation without causing pain."

The Governor also spoke about a possible downgrade of Israel's credit rating as a response to the government's planned judicial reform and explains why he believes that inflation will return to the Bank of Israel's annual target range of between 1% and 3%, although it currently stands at an annual rate of 5.4%.

Only a month ago the Bank of Israel's research department forecast that the interest rate would be 4% at the end of the year and we are already above that?

Yaron: "Remember that in the previous rate decision we said that if the data would be steeper we would need to raise the interest rate higher than the forecast and that is what has happened. The data were higher than expected. The CPI surprised us and everyone in the market. Equally important, core inflation seems to be sticking around and the decision takes into account the balance between the risk of inflation and moderating activity.

"Our main role and responsibility is to make sure that inflation does not increase and does not cause damage to the economy. Price stability is a basic condition for a stable and growing economy, and the interest rate tool is the one we use. Before taking any steps, we examine the world of mortgages and know that it hurts, but you cannot lower inflation without this pain and we will continue to work to eliminate it.

"As a matter of fact, we see from the data that the Israeli economy has a high level of activity and employment is high, which even increased at the end of the year. And I want to say one more thing: it is true that there has been a number of interest rate hikes, but despite the surprise in the CPI, inflation expectations show that we will return to the target range at the end of this year, or at the beginning of 2024. If before we were moving towards returning to the target at the end of this summer, so now we are talking about the end of the year, or the beginning of next year, and this would not have happened without the interest rate hike policy."

Will rates of 4.5% or 4.75% be the peak or will we see rates similar to the US where the peak is expected to be 5.25%?

"We really believe that in the coming months we will see a more significant fall in inflation. Despite what I said about core inflation, we are seeing the beginning of it moderating, for example in the mortgage market as well as in other areas. I believe that the expectations are consistent as long as there are no shocking surprises such as in the budget or wages. Most of the interest rate increases are for sure behind us and at this point we need to see the data that will come later and act on it."

Mortgage takers are already paying NIS 1,000 per month or more than they paid a year ago. Aren't you concerned that continued rate hikes will bring about credit defaults? התרגום ארוך מדי לשמירה

"I will again stress that we are aware of the pain and of course analyze it and the issue of mortgages in all our decisions. But I will also mention that inflation hurts the weak populations first and foremost, and if we do not eliminate inflation the pain will be much greater in the future, especially for these populations. Our data show that the increase in the monthly repayment of the average mortgage taken in the last five years is below NIS 600. We understand the pain, but it is impossible to lower inflation without some pain.

"I am happy about the steps the banks have taken. The interest rate tool is a horizontal tool. Mortgage loans in Israel are given conservatively, whether it is the monthly repayments or the size of the loan, and we do not see a systemic problem. It is good that the banks are helping those households that are in extreme distress, whether through a formal overall plan or in individual cases."

"The independence of the Bank of Israel is more important for the economy

In recent weeks, due to the government's planned judicial overhaul economists in Israel and worldwide have warned that rapid and wide-ranging changes may harm Israel's economy, and even lead to a downgrade of Israel's rating. Prof. Yaron himself conveyed messages to the government in the spirit of what he heard from those economists and international bodies.

Are you concerned about Israel's credit rating being cut, and do you see any indications of this?

"I don't have a crystal ball and I can't predict the future. Obviously, as an economist, it's important for me to reflect the world's experience and say that we know, and I've expressed this publicly, that independent and strong institutions are an essential component of a developed and prosperous economy. For this reason, many of the international bodies point to this issue. Therefore, in any process that is promoted, the independence and strength of the institutions must be preserved. But it is also important to understand that Israel's economy is strong and growing, certainly compared to other countries today. The state of the economy is strong. The economy has also shown dynamism and the debt-to-GDP ratio has fallen to the level it was before the Covid pandemic."

Two weeks ago Prof. Yaron was drawn into a confrontation with the chairman of the Knesset Finance Committee MK Moshe Gafni (United Toprah Judaism) after he spoke about the possible damage to Israel's economy and was asked why he as Governor needs to intervene on questions in which half the people is in dispute with the other half.

Are you concerned about harm to the independence of the Bank of Israel?

"The independence of the Governor and the independence of the Bank of Israel are of course extremely important for the economy, and the international agencies speak clearly about this as well. We know what history shows regarding those countries where the independence of the central bank was compromised, and this had a devastating impact on the economy. I believe that all decision makers understand this."

In recent weeks, several investment houses and even some banks have spoken out about the fact that investors are starting to withdraw their money from Israel, and others will think twice about investing their money in Israel. The first to speak about this, Bank Hapoalim CEO Dov Kotler told this to Prime Minister Benjamin Netanyahu in front of dozens of business leaders.

The Bank of Israel constantly monitors foreign exchange movements. Have you seen significant movement of funds from Israel abroad by foreign investors or by Israelis?

"We are in dialogue with the banks on a frequent basis and are aware of what is being said out there. From our monitoring, and from what I can see as Governor, we do not currently see any abnormal activity at the macro level."

Over the past month there has been a significant depreciation of the shekel of almost 3% and 5% against the dollar and this could weigh on inflation. How dramatic is this in your eyes?

"The shekel has undergone many fluctuations in the last three months. We have seen it touch NIS 3.35/$ and recently it has hovered around NIS 3.55/$. At the same time, we have seen recently that the close connection between the shekel exchange rate and stock market performance has weakened. However, the changes have occurred over a very short period of time, so it is difficult to point to a clear trend, but the uncertainty for sure does not help the strengthening of the currency. It is clear that if the other parameters are kept constant (which define the level of inflation) and there is a depreciation of the currency, it does not help to eliminate inflation."

Since the start of the year we have seen a significant fall in state revenue from taxes. How does this influence your policy and would you recommend that the government cut expenditure?

"There is no doubt that we saw high tax revenues over the past year, and we associate this, among other things, with the boom in the real estate sector as well as in high-tech. The decline is from a very high level, but it is still high. In our assumptions for fiscal plans, we take into account that there will be a certain decrease, and therefore in the discussions on the budget, we constantly emphasize the need for the government's fiscal responsibility, and I am glad that the Minister of Finance is speaking out about the coordination between fiscal measures and monetary policy."

Published by Globes, Israel business news - - on February 20, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Bank of Israel Governor Prof. Amir Yaron credit: Eyal Izhar, Tali Bogdansky
Bank of Israel Governor Prof. Amir Yaron credit: Eyal Izhar, Tali Bogdansky
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