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Monetary Policy and Financial Stability Policies in Israel


									Monetary Policy and Financial
 Stability Policies in Israel

                  Presented at Economic
                    Dialogue Meeting
                  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
§   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)
    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
                      GDP Growth Rates in Israel and
                       in the Advanced Economies

-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.
SOURCE: OECD Data and the Bank of Israel
                     Israel’s Annual GDP Growth Rates
                                    (2000 – 2012F)


Bank of Israel forecasts for 2012
                          Goods imports and exports*
$ 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)



SOURCE: Based on Central Bureau of Statistics Labour Force Survey.
                      Real Wage per Employee Post*

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

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.
**2011 and 2012 Budget deficit is based on the current budget and BOI forecast.
                            Gross Public Debt
                           (Percent of GDP, 2000-2012F)

*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.
       The Bank of Israel Interest Rate, Actual Inflation,* and
                      Inflation Expectations**
        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


SOURCE: Research Department, Bank of Israel
          10 Year Break-Even Inflation Expectations*

10 years average Inflation Expectation.
SOURCE: Research Department, Bank of Israel
           The Nominal and the Real Exchange Rates

                                     Shekel / Dollar Exchange Rate


                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

                    Israel (Tel Aviv 100)

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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