"The negative real interest rate in Israel has fulfilled its purpose, and it is now doing more harm than good to the economy, especially the business sector. The Bank of Israel should begin raising the interest rate," said Mizrahi Tefahot Bank (TASE:MZTF) CEO Eldad Fresher on Tuesday at the Bar Ilan University Business Science Club.
"The negative real interest rate creates two problems. The first is the continuous rise in real estate prices, which creates a social problem. Stock markets are rising and inflated, without necessarily having economic justification, because of the lack of alternative investment options. The latent economic risk from both these factors creates a major social problem and widens the gaps between the rich and the poor."
Fresher said that people with financial wealth know how to exploit the negative real interest rate to their benefit. "They buy apartments for investment and ride the stock market rally," he said. "In contrast, people without the means to buy a home or who lack the knowledge and tools to play the capital market, have very little disposable income, which has only dwindled over the years."
Fresher added, "Worse, most of these people depend on bond investment instruments for their pension savings, which is not only widening the current gap between them and the rich, but also widens the future gap between their pension income and that of rich people. Most of our pension investments are in long-term savings plan and the negative real interest rate is eroding the pension, so that people who retire at 67 will discover that their pension does not meet the salary there were accustomed to. The result is that we're widening both current and future economic and social gaps, a problem, which, instead of improving, is deteriorating, partly because of the Bank of Israel's policy."
The disadvantages outweigh the advantages
Fresher told "Globes", "There was a point in time when it was correct to take this [negative real interest rate] policy to stimulate exports and create jobs, but after using this policy for five straight years, the disadvantages outweigh the advantages, and the main result is inflating real estate and stock prices."
"Globes": The objective of the low interest rate is to stimulate growth. Don’t you think that that happened?
Fresher: "In theory, this money was supposed to reach the business sector to stimulate business, but in practice, business credit did not grow, even if you add the credit taken from investment institutions. The banks deposited the money at the Bank of Israel, and the institutions took the money and bought government bonds, which inflated prices."
Raising the interest rate is liable to damage the shekel, and further burden exporters. Doesn’t this worry you?
"First of all, despite the low interest rate, the shekel has strengthened in the past few years; not because of speculators, but because of surplus exports and the gas discoveries. The government has tools to stimulate exports, such as foreign trade insurance, export grants, and tenders with international agencies. Monetary policy is one of a set of tools held by the authorities. Using only one tool over time without using the other tools has become inefficient, and has raised prices in unintended places, such as in real estate and the capital market."
The low interest rate is not unique to Israel. Is you criticism aimed at Israel, or at the world?
"The low interest rate is due to the financial crisis, which began in the US, and throughout had American symptoms. The low interest rate is the right solution for the US, and we're seeing signs that it is emerging from the crisis and that jobs figures are improving. But this policy is unsuited for Europe and Israel, and is not suited for some emerging markets. Monetary expansion will ultimately end with an American decision, and the way back is liable to very problematic and painful."
Published by Globes [online], Israel business news - www.globes-online.com - on April 30, 2014
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