BoI Governor rebukes politicians for damaging economy

Amir Yaron  photo: Rafi Kutz

Prof. Amir Yaron called on Israel's politicians to restore fiscal certainty and responsibility as soon as possible after the elections, in order to avoid damage to the economy.

Governor of the Bank of Israel Prof. Amir Yaron has warned that an increase in uncertainty in Israel in recent weeks was damaging the economy. In his most critical speech to date, Yaron said that Israel's elected officials "bore responsible for restoring certainty after the elections," referring among other things to the need to address the budget deficit deviations and restore confidence in the markets in the Israeli government's budget management.

Yaron spoke today a conference of the Israel Economic Association at the Hebrew University of Jerusalem. His lecture was entitled, "Are We Taking Stability for Granted again? (or Whether There is any Need for Central Banks)." With repeat elections looming and the severe deviations in the budget deficit, Yaron added comments about current events to his lecture, stating towards the end of his speech that uncertainty in Israel had increased in recent weeks. He added that although the financial markets had not shown too much concern about it so far, this did not mean that no damage was taking place. He declared that something had to be done about this in the current challenging period. He called on policy-makers and politicians to behave responsibly and do everything possible to restore fiscal certainty and responsibility as soon as possible after the elections, in order to avoid damage to the economy.

In his lecture, Yaron revealed that the Bank of Israel would soon publish a comprehensive report with recommendations to the government for promoting productivity in the economy, including recommendations for measures in education, infrastructure, and the bureaucracy, with analysis of the measures' long-term costs and benefits.

At the start of his lecture, Yaron remarked, "Since I took up my position as Governor of the Bank of Israel, I have seen how the Bank of Israel's measures in its various roles contribute to the economy's growth and its resilience in the face of shocks." The main part of his lecture concerned the importance of moderating fluctuations in order to protect the individual against volatility in the business cycle. "A stabilizing policy is not confined to smoothing out fluctuations in consumption; it also contributes to the growth rate and improving per capita consumption," Yaron declared. "It is important to state - there is 'bad' uncertainty, because of which stability needs to be maintained, but there is also 'good' uncertainty, as shown by a study I conducted with Segal and Shaliastovich. We have to preserve stability while allowing good uncertainty, reflected in innovation and technological improvements, research and development, and competition."

Yaron spoke at length about the effect of recessions accompanied by a contraction in the business cycle. He said, "The stability report that will be published soon examines the effect of the financial cycle's force on periods of slowdown in Israel. It can be seen that at times of financial cycle contractions, the damage to the cycle in the real economy is significant." He explained, "One of the questions arising from such analysis concerns the need to establish counter-cyclical capital funds - requiring the banks to maintain a high capital ratio during booms and allowing them to reduce it during slowdowns, thereby relieving the constraints on the supply of credit at such times."

Yaron described the contribution of the Bank of Israel's monetary policy to stability in the banking system, and later also through macro-stabilization measures, which he said managed to prevent excessive leverage, despite the low interest rate; strengthening the banking system's capital fund in order to enhance its resilience in the face of crises; and increasing the foreign currency balances to 30% of GDP in order to reinforce the economy's financial cushion.

Yaron emphasized, "Despite these actions, additional measures should be carried out, among other things because the credit market is becoming more diverse and requires a broad regulatory view, and because the volume of credit granted by non-banking concerns has been growing in recent years, due to the reform in this market, among other things. Regulation for non-banking concerns, especially regulation of consumer credit, is not the same as regulation for the banks. The difference in the character of the activity between the two types of concerns justifies some difference in regulation, but is important to make sure that these differences do not develop into regulatory arbitrage that is liable to create a systematic risk under certain circumstances."

Amir therefore cited the importance of the financial stability committee, which convened in April 2019 for the first time. He went on to say, "Another sphere for which the Bank of Israel is responsible, in contrast to most of the world's central banks, is the governor's role as an economic adviser to the government. As such, the Bank of Israel advises the government to increase the growth rate in the long term. The Bank of Israel Research Division states the main policy measures that can enhance long-term growth in education, infrastructures, and bureaucracy. The Bank of Israel is currently writing an organized report setting out its recommendations to the government for improving productivity in the economy, while analyzing the measures' long-term costs and benefits, which we will publish soon."

Yaron concluded his speech by saying, "It is obviously important to allow and promote innovation and competition, but as I have emphasized throughout my lecture, it is no less important not to take stability for granted. There is great value for the overall benefit of policy that stabilizes volatility and uncertainty in the short, medium, and long term, and certainly when volatility is growing in a state of financial crisis. Uncertainty in Israel has increased in recent weeks. The financial markets have not shown too much concern about it so far, but this does not mean that no damage is taking place. It is clear that there is something that must be addressed, and that this is a challenging period. In order to avoid damage to the economy, policy-makers and politicians should behave responsibly and do everything possible to restore fiscal certainty and responsibility as soon as possible after the elections."

Published by Globes, Israel business news - en.globes.co.il - on June 6, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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Amir Yaron  photo: Rafi Kutz
Amir Yaron photo: Rafi Kutz
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