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Monetary Policy and Financial Stability Policies in Israel

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					Monetary Policy and Financial
 Stability Policies in Israel

                  Presented at Economic
                    Dialogue Meeting
                            by
                  Dr. Edward Offenbacher
                Director, Monetary/Finance
                 Division, Research Dept.
                       Bank Of Israel

                      January 2012
            Outline of Presentation


§   Key Macroeconomic Developments

§   Issues for Monetary Policy

§   Issues for Financial Stability
    Key Macroeconomic Developments

§   Slowdown of real growth after seven “good years” of export-led
    growth
§   Low unemployment but moderate wage increase.
§   BoP – CA deficit due mainly to ToT “hit”.
§   Inflation moderating after target misses.
§   House price inflation.
§   Fiscal policy: Expenditures within target path despite pressures
    from defense, social justice; tax receipts slowing due to growth
    slowdown so deficit missing target.
§   Monetary policy: Tension between domestic vs. foreign pressures.
    Issues for Monetary Policy

§   Growth slowdown w/ economy near full employment:
    weak demand side or supply constraints? Where is
    relevant potential output?

§   Slowing inflation: one-time effects or indicator of
    recession ahead? Why is wage growth subdued?

§    Interest rate differentials: Potential for capital inflow,
    local currency appreciation (on hold recently).

§   Complaints of “credit crunch” – how legitimate?
    Financial Stability Policy Issues (1)

§   Financial stability policy (aka Macroprudential Policy): Do
    we know what it is? Do we have relevant information
    and analysis – in the profession, in Israel?
    Contagion/network effects; credibility/confidence.
§   Key measues taken in Israel: (a) Capital surcharge on
    high LTV mortgages; (b) Limits on variable rate
    mortgages; (c) Reporting/reserve requirements on
    foreign activity in Makam and derivatives; (d) Elimination
    of tax exemption for foreigners on Makam interest.
§   Key new measure: adoption of Basel III Tier 1 capital
    adequacy requirements for banks.
Financial Stability Issues (2)

n   “Imported” issues
    n   European crisis – direct (financial) and indirect (trade)
        exposures
    n   Geopolitical: Arab spring, Iran
    n   U.S.: Looking better for now, but…


n   “Home-made” issues
    n   Highly leveraged conglomerates
    n   House price inflation
    n   Construction industry loans
Thanks
                      GDP Growth Rates in Israel and
                       in the Advanced Economies
  %
                                               (2000-2011)




-The Quarterly data show the seasonally adjusted rate of change from the previous quarter at an annualized rate.
-The growth rate for the advanced OECD economies (excluding Luxembourg and Iceland) is a simple average of
 their individual growth rates.
                                                                                                          8
SOURCE: OECD Data and the Bank of Israel
                     Israel’s Annual GDP Growth Rates
                                    (2000 – 2012F)

  %




                                                        9
Bank of Israel forecasts for 2012
                          Goods imports and exports*
                                               (2000–2011)
$ millions




                                                      Goods Exports



              Goods Imports




* Monthly figures, $ million, at current prices. Imports and exports excluding airplanes, ships and diamonds.
SOURCE: Bank of Israel.                                                                                   10
                       Main labor market Indicators
                    (Quarterly data, seasonally adujsted,1997-2011)
     %



                                                                      57.4




                                                                      5.6




                                                                             11
SOURCE: Based on Central Bureau of Statistics Labour Force Survey.
                      Real Wage per Employee Post*
                                             (1999-2011)




*Seasonally adjusted, 3 months moving average. 2004 prices.
                                                              12
SOURCE: Based on Central Bureau of Statistics Data.
            Current Account of Balance of Payments
                               (Percentage of GDP, 1995-2011)
     %




                                                                13
SOURCE: Balance of Payments, Central Bureau of Statistics.
                                          Budget Deficit*
                                    (Percent of GDP, 2000-2012**)                                              %




*Percent of GDP; excluding credit extended. The data refers to the deficit excluding the Bank of Israel’s profits.
                                                                                                             14
**2011 and 2012 Budget deficit is based on the current budget and BOI forecast.
                            Gross Public Debt
                           (Percent of GDP, 2000-2012F)
 %




                                                          16
*Bank of Israel forecast
                            The Tax Burden in Israel
                           and in the OECD Countries
                                      (Percent of GDP, 2010)
   %




Including income tax, social security tax, fees, levies and fines,
Including consumption taxes, levies on specific goods & services and valued added taxes.
                                                                                           17
SOURCE: OECD data
       The Bank of Israel Interest Rate, Actual Inflation,* and
                      Inflation Expectations**
  %
                                                 (2004–12)
        Inflation expectations




* In the previous twelve months.
** Twelve months forward, calculated form the capital market.   18
SOURCE: Bank of Israel.
        Inflation Over Past 12 Months, Inflation Targets
     and Inflation Expectations from the Capital Market
 %                                        (1997-2011)




                                                    Consumer price
                                                        index




          Inflation
        expectations




                                                                     19
SOURCE: Research Department, Bank of Israel
          10 Year Break-Even Inflation Expectations*
                                              (2001-2012)




10 years average Inflation Expectation.
                                                            20
SOURCE: Research Department, Bank of Israel
           The Nominal and the Real Exchange Rates
 NIS
                                                 (1997-2012)




                                                                                                                                          3.8
                                     Shekel / Dollar Exchange Rate


Index

                The Real Exchange Rate by
                       Trading Partners
                         (100=01/1997)                                                                                                  111.8
                                                  •A rise in the index indicates depreciation.
                                                  •The figure for the last month is calculated from spot exchange rates known for the
                                                  half-month, our forecast CPI from the monthly model, and an extrapolation of
                                                  inflation in the countries whose currencies are in the currency basket.
                                                  •SOURCE: IFS and Bank of Israel




Ø The NIS/$ chart is on a daily basis, while the real exchange rate chart is on a monthly basis.                                           21
                   10 Year Israel-US Gov. Bond Spread
                             and EMBI+ Index
                                       (Basis points 2006-2012,)




               Israel-USA Government                                      EMBI +
                Bonds 10 Years Spread




The EMBI+ tracks total return for traded external debt instruments in the emerging markets.
The EMBI + expands upon the original EMBI index which covered only Brady Bonds.               22
SOURCE: Bank of Israel
         The Stock Markets: Israel, NASDAQ and the
                    Emerging Markets
Index                                       (1/6/2006=100)



                                            Emerging Markets




                                                               NASDAQ
                    Israel (Tel Aviv 100)




                                                                        23
SOURCE: Bloomberg
Credit Balances Outstanding
      (2006-2011, NIS Billion)
Credit from the Banking Sector
       (2006-2011, NIS Billion)
Credit to the Business Sector
      (2006-2011, NIS Billion)

				
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