BoI Governor reiterates judicial overhaul could hit economy

Amir Yaron  credit:  Alex Kolomoisky, Yedioth Aharonoth
Amir Yaron credit: Alex Kolomoisky, Yedioth Aharonoth

Prof. Amir Yaron said legislative changes should be carried out with broad agreement, and maintain the strength and independence of institutions.

Governor of the Bank of Israel Prof. Amir Yaron, who heads the Monetary Committee, gave a press conference after it announced that the interest rate would remain unchanged at 4.75%, ending a run of 10 consecutive rate hikes.

Yaron spoke about the weakness of the shekel, which he said stemmed mainly from domestic factors and less from the global environment. He said, "This is an excessive depreciation and conservative estimates indicate that it has added 1%-1.5% to inflation. As long as the shekel weakness continues, this will weigh and could require a policy of even more monetary restraint."

Asked by "Globes" about possible Bank of Israel intervention in forex trading he insisted, "At the moment the market is functioning and so we don't usually intervene. However if there will be dramatic changes or market failure, we have a toolbox that we know how to use."

He also spoke about the judicial overhaul. "I would like to say a few words about the judicial reform's impact on the economy, which has been on the public agenda over recent months. I have said several times in the past that due to the promotion of such reforms there was an increase in the level of uncertainty in Israel’s economy, reflected in, among other things, the excess depreciation of the shekel and the underperformance of Israel’s stock market.

He added, "Continued uncertainty is liable to have notable economic costs, as reflected in the risks to the Research Department’s forecast, and some of which I noted earlier in my remarks. The IMF has also indicated, in its most recent report, the adverse impact from the continued uncertainty over time. Therefore, it is important to bring back the stability and certainty to the Israeli economy, and to verify that legislative changes will be carried out with broad agreement, and will maintain the strength and independence of the institutions.

Legislative intervention in market mechanisms may distort the system"

On benefits that the banks have given customers following his reprimand, Yaron said that the steps taken "go in the right direction, encourage the market mechanisms and business competition and can help the relevant customers." But hhe stressed, "Legislative intervention market mechanisms may distort the system and achieve an undesirable result."

Did the Bank of Israel react late, which has resulted in Knesset and government initiatives?

"The way to be benefit customers is through reforms that will lead to competition. Two banks and payment companies have entered the market, switching banks with a click, open banking, transparency on interest rates and mortgages. These things do not reach maturity immediately, but will lead to improvement over time. We certainly told them to sharpen their pencils."

The banks responded to your demand and came out with a range of benefits, which ultimately mean just hundreds of shekels for current accounts and 1%-2% less on overdrafts on double digit interest. Is that sufficient in your opinion?

"The measures that have been undertaken are in the right direction. We hope that the very competition and also the transparency that we are presenting to the public now will lead, either on the part of the customer or on the part of the banks, to measures that will further benefit customers."

You have said that you expect non-banking bodies to enter the market to improve competition. But we see again and again these bodies getting into trouble. In your opinion, should the Bank of Israel take part in actual supervision of these entities and get into the thick of it? And won't the sale of the credit card companies to the insurance companies detract from this competition?

"As for the credit card companies, there are complex aspects to this issue and if necessary we will issue a paper and detailed position. Regarding the non-bank entities, we want to see a correct balance there. The stability (of these entities) is an important issue. You see in other countries how everything changes and how all the attention is directed there. That is why we want to see non-bank entities but want them to be properly supervised. Some of these entities are currently not under our supervision, and on the one hand, they must have the ability to be under less rigid conditions than the banks, and thus they will challenge the banking system, and on the other hand, we must ultimately remember the customer and make sure that there is sufficient proper supervision at the customer level and supervision, so that they do not become systemic incidents."

The Governor was asked whether further intervention by the Bank of Israel is expected if Knesset bills to intervene in the banking system continue to be tabled. "It would be wrong even if in the short term it would lead to solutions, it would be wrong to enter the world of pricing. We will be in dialogue with MKs. Entering the field of influencing market mechanisms is, in my opinion, an issue that has a horizontal effect, it is wrong and causes distortions. It is incorrect and inappropriate," Yaron said.

After the previous interest rate decision, the Governor said in an interview with "Globes" that he will soon decide if he wants to continue for another term. He was asked about it again and said that "I will make my decision later, I believe it will be made around the holidays. In the meantime, I am very busy with work."

Is there a connection between the fact that you warned about the dangers of the judicial overhaul and whether the prime minister and minister of finance will agree to grant you another term, and how would you describe your working relationship with them? Are you concerned if you don't continue to be Governor about the independence Bank of Israel?

"The independence of a central bank is a critical matter for the economy and it doesn't matter who the governor is. Everyone understands and the markets are looking at it. That's why this issue is very important for the welfare of the economy. In all the countries where the central bank has been harmed, the economy was harmed. I have a constructive relationship with the finance minister and prime minister. I repeat, right now I have my hands full, and I will make my decision at least, I estimate, near the holidays."

Bank of Israel warns on the fall in high-tech financing rounds

Looking ahead, the Bank of Israel lists three risks. The first is at the political level, the second is the rate of inflation abroad and the third, the most recent of the three, is the decline in the scope of funds raised in high-tech economic activity.

A major risk, the Bank of Israel says, "is that the judicial and institutional changes will be accompanied by one or more of the following developments: an increase in the state's risk premium that will be accompanied by a depreciation of the shekel, damage to exports, a decrease in local investments and demand for private consumption."

Another risk factor is inflation abroad. "It is expected to converge to around 2% during the forecast period. At the same time, due to the relatively slow decline in the rate of inflation in the prices of services in the US and Eurozone, there is a risk that the rate of convergence will be slower than we assumed in the forecast and will contribute to higher local inflation and a more restrictive monetary policy," the Bank of Israel stated.

Finally, the central bank referred to the high-tech sector. "Recently we have witnessed a decline in the volume of funds raised by startup companies in Israel. This decline is apparently stronger than the decline in startup investments worldwide, which are recovering to some extent in comparison with startup investments in Israel. Although the various indicators of activity in the high-tech industry in Israel indicate only a slight moderation, after high growth rate in 2022, a continued decline in startup investments poses a risk to the growth forecast."

Published by Globes, Israel business news - - on July 10, 2023.

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

Amir Yaron  credit:  Alex Kolomoisky, Yedioth Aharonoth
Amir Yaron credit: Alex Kolomoisky, Yedioth Aharonoth
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