New BoI Governor expresses caution on rate hikes

Prof. Amir Yaron Photo: Rafi Kutz

Prof. Amir Yaron was sworn in today in the presence of the president, the prime minister, and leading economic figures.

Governor of the Bank of Israel Prof. Amir Yaron took office today at the President's Residence in Jerusalem in a ceremony attended by the president, the prime minister, the minister of finance, and leading economic figures. Yaron wasted no time in making it clear that he is in no rush to raise interest rates.

Prime Minister Benjamin Netanyahu told Yaron, "You have one of the most brilliant brains in the world in macroeconomics. I and the minister of finance believe that you are the right person in the right place for the economy."

Speaking at the ceremony, Netanyahu asserted that the Israeli economy had reduced inequality in recent years. "Israel was once next to last in inequality; now it is close to the average. The cliché that the rich are getting richer and the poor are getting poorer is wrong. In the past decade, the bottom deciles got the biggest salary increases." Netanyahu also complimented National Economic Council chairperson Prof. Avi Simhon, saying that he had first put forth Simhon's name as a candidate for Governor of the Bank of Israel. "We have other things to do, such as finishing the transportation reform, and there is the question of the cost of living for certain products. I and the minister of finance are focusing on this, but keep in mind that the minimum wage rose in Israel more than in any other Western country. In absolute term, the minimum wage is now higher in Israel than in France."

Netanyahu added, "The new Governor faces two related tasks, the achieving of which will affect the nation's economy for many years. The first is increasing competition in the banking system, where concentration is too great. In the tension between stability and efficiency, the Governor should lean in the direction of greater efficiency, because this is what will reach the consumer. The second task is bringing Israel into the new era of technologies in which we excel in order to provide the consumer and businesses with better access to the credit market. It also has to be done responsibly, because we don't want credit bubbles. We have to be very careful about this."

Rivlin: The first challenge is to narrow social gaps

President Reuven Rivlin began his speech by saying, "We may be meeting today at the beginning of a tense period in economics and finance. For years, Israeli economic captains have steered us wisely and calmly through global and local economic crises and shocks, and have demonstrated the soundness and stability of the Israeli economy. I am confident that this calmness and wisdom will continue to guide us through the storm."

Rivlin devoted a great deal of his speech to social matters, headed by the cost of living, saying that the price increases "harm our national effort, harm middle-class Israelis, and harm the most economically disadvantaged." Rivlin added, "When we look inwardly at the elements of socioeconomic cohesion, we have a lot to be proud of. In addition to these extraordinary achievements, we also face great and weighty economic challenges, Mr. incoming Governor. The challenges facing us are our condition for moving from a state of two economies, high tech and conventional, to a single strong and stable economy.

"The first challenge is addressing the social gaps in Israel. It is no secret that the social gaps in Israel are among the widest in the OECD. There is still a strong connection in Israel between where you were born and your opportunities, your income, the quality of your education, and the social services you receive. This is a painful state of affairs that should keep us awake at night. The bottom third in Israel today consists mainly of Arab and haredi society, and our social mobility mechanism does not work well enough for them.

"The second challenge, which is currently in the headlines, is the ability of middle-class Israelis to live with dignity. Israelis at the median, who belong to neither the upper nor lower deciles, are still part of the second economy. Productivity and wages are low in Israel and the cost of living is high, especially housing and food. These Israelis work hard, but their salaries and the cost of living leaves them with too little.

"The gap between the average wage and the median wage in Israel is among the highest in the OECD. This gap has narrowed in the past decade, and in this respect, I hope that we are on a positive trend. At the same time, the feeling is that during the periods of rapid growth in the Israeli economy, together with the pockets of excellence we have developed, too many Israelis have been left behind: those in the middle, and those below the middle. When productivity is low and the middle class consists of employees having a hard time making ends meet, it will be very difficult for us to pull the top and bottom deciles towards the middle, for the simple reason that this middle is unattractive.

"My dear Prof. Amir Yaron, incoming Governor of the Bank of Israel: we recently learned about concern for a wave of price increases in Israel, which has been halted for the moment following rapid intervention by the minister of finance and his ministerial staff. The price increases harm our national effort, harm middle-class Israelis, and certainly harm the most economically disadvantaged. Maintaining stable prices is one of the primary goals of the Bank of Israel, which also functions as an economic adviser to the government. The Bank of Israel's research is thorough, professional, and excellent, and economic policy should follow the path that it indicates. The legislator has authorized the Bank of Israel to exercise complete independence in the fulfillment of its duties.

"This freedom of action awarded you as Governor of the Bank of Israel is designed to relieve of considerations and pressure from parties with axes to grind, leading economic figures, and the political system. It imposes on you the duty to act with extra professionalism and care. The coming year is an election year, but it is important to keep in mind that the Governor of the Bank of Israel is not an elected position. The Bank of Israel sits within the people. It focuses on data and facts, as well as on groups whose voice is sometimes unheard.

"You have an exciting and exhausting road ahead of you. It will not be easy. You will find your picture and headlines about you in the general and economic media, and not necessarily because you are esteemed scholar. They will write articles for and against you. It will not be easy, but we believe in you and your ability to successfully steer Israel's monetary policy and keep the Israeli economy strong. We wish you success."

"The immediate challenge facing the Bank of Israel is the normalization of monetary policy"

"The immediate challenge facing the Bank of Israel is the normalization of monetary policy," Yaron said. His use of the term "normalization" refers to the interest rate hike begun last month by the Bank of Israel in order to bring the interest rate in Israel back to levels considered "normal."

Yaron emphasized, "It is important that the interest rate is not raised too rapidly or aggressively, as that may halt growth, but also not with a delay which is liable to cause a non-optimal allocation of resources, and an outbreak of inflation."

Commenting on exchange rate policy, Yaron said that he intended to continue the Bank of Israel's current policy: "…the exchange rate should be determined by market forces, without the need for significant intervention in the foreign exchange market. However, the Bank will continue to act in the foreign exchange market should there be anomalous fluctuations in the exchange rate that are not in line with the underlying economic conditions in the economy. The second challenge is maintaining financial stability, capital market efficiency, and the integration of innovative financial technologies

"An extremely important challenge is the challenge of economic growth, productivity, and budgetary policy… As is emphasized in my research, and is found to be manifested in financial markets, the changes that are significant and important to the economy and to the rise in the standard of living of its residents are the ones derived from the multi-year growth path, in contrast to purely transitory changes in growth rates," Yaron added. "Therefore, the Bank of Israel, as the economic advisor to the Government of Israel, and in coordination with the other relevant functions in the Ministry of Finance and in the government, will continue to assist and support the objectives of the government’s economic policy, in increasing growth and employment for the benefit of all the citizens of Israel.

"Therefore, the Bank of Israel, as the economic advisor to the Government of Israel, and in coordination with the other relevant functions in the Ministry of Finance and in the government, will continue to assist and support the objectives of the government’s economic policy, in increasing growth and employment for the benefit of all the citizens of Israel. To maximize the potential growth inherent in the Israeli economy, there has to be large investment in infrastructures, an increase in efficiency and improvement in the business environment, incentivizing private capital investment. Likewise, we have to work to improve human capital at all levels of society through education and training that are aligned with the requirements of the labor market. As someone coming from research and teaching, this issue is particularly close to my heart. An improvement in human capital will not only increase economic efficiency, but can also contribute to battling poverty, and improve social mobility.

"The Israeli economy and financial system are resilient and stable, but the markets’ volatility and declines in recent months, the possible end of the current business cycle, and the negative developments in world trade emphasize the importance of responsible fiscal conduct. Therefore, particularly in periods in which there are increasing demands for various expenditures, it is important to implement an adequate multiperiod budget path that will maintain, and even improve, the debt to GDP ratio… It is the government that decides on the division of the pie, in accordance with its priorities.

"The Bank of Israel will assist the government to do so, and will serve as a professional and independent advisor… In order to examine and implement desired changes, it is important that the relationship between the Bank of Israel and the government will be open and honest… My conversations with the prime minister and with the minister of finance imbued me with optimism regarding such future collaboration."

Published by Globes, Israel business news - - on December 24, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

Prof. Amir Yaron Photo: Rafi Kutz
Prof. Amir Yaron Photo: Rafi Kutz
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