The fact that stock markets around the world discovered the shaky state of the global economy does not necessarily indicate the analytical ability of those active in it. The signs were there for months, and it is therefore difficult to rely on the stock markets in an effort to understand what is likely to happen in the global economy, and what direction economic policy will take in each place.
Three factors were the focus of attention among policy-makers, ministers of finance, and governors of central banks. The first and most important is the depth of the anticipated slowdown, if the most pessimistic forecasts for the Chinese economy materialize. The second is escalation in the currencies war that began immediately after China's announcement of a devaluation in its currency. The third factor is the deflationary trend that began in recent months, to a considerable extent as the result of a steep drop in commodity prices.
At the domestic level, the one who has to decide how these three factors will affect the shaping of policy is Governor of the Bank of Israel Karnit Flug. All eyes are naturally pinned on her, because the stock exchanges drop comes shortly before the weekly interest rate decision. Some are confident that the recent events will necessarily lead to a cut in the interest rate to 0% and quantitative easing in order to make financing costs even lower. There is little chance, however, of this happening.
Keep in mind that put until only a few weeks ago, Flug saw an economy growing 3% a year, with an inflation rate converging to the middle of the inflation target, in other words, to 2%. The financial markets were also not particularly volatile. It is true that the events of recent days are a long way from the rosy picture that the Bank of Israel painted for itself, but it appears that at least this month, the decision will be to wait and see how the current story develops.
A distinction should be made, however, between what Flug does tomorrow and her longer-term policy, because it is possible that after tomorrow, her considerations could be different, in view of the possible worsening of the currencies war. Every central bank in the world, including the Bank of Israel, knows now that the statement that deflation is behind us is totally groundless.
According to the recent estimates by the Central Bureau of Statistics, the trend data for the rise in the Consumer Price Index indicate almost zero inflation, and that is still before the full effect of the drop in global commodity prices is felt. This means that the central bank may have to use tools that it thought it had evaded, headed by an interest rate cut to zero. Up until a month or two ago, the question was when the US Federal Reserve Board would raise the interest rate, thereby helping to weaken the shekel.
This will not happen in the near future, and that means that the Bank of Israel can expect no "help" from the Federal Reserve Board, and will have to plan its measures at a time when growth figures are not encouraging, exports are shrinking even before the currencies war, and the global economy is moving towards another slowdown. What has happened in recent days is a far cry from the rosy picture that the Bank of Israel painted for itself, but it appears that at least this month, its decision will be to wait and see how the storm develops. After tomorrow, Flug's considerations could be different, in view of the possible worsening of the currencies war.
Published by Globes [online], Israel business news - www.globes-online.com - on August 23, 2015
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