Monetary Policy and Financial Stability Policies in Israel Presented at Economic Dialogue Meeting byDr. 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) • “Imported” issues • European crisis – direct (financial) and indirect (trade) exposures • Geopolitical: Arab spring, Iran • U.S.: Looking better for now, but… • “Home-made” issues • Highly leveraged conglomerates • House price inflation • Construction industry loans
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. SOURCE: OECD Data and the Bank of Israel 8
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) 12 *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) % 13 SOURCE: Balance of Payments, Central Bureau of Statistics.
Budget Deficit*(Percent of GDP, 2000-2012**) % 14 *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) % 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. SOURCE: OECD data 17
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. SOURCE: Bank of Israel. 18
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) 20 10 years average Inflation Expectation. SOURCE: Research Department, Bank of Israel
The Nominal and the Real Exchange Rates(1997-2012) NIS 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 21 • The NIS/$ chart is on a daily basis, while the real exchange rate chart is on a monthly basis.
10 Year Israel-US Gov. Bond Spread and EMBI+ Index(Basis points2006-2012,) EMBI + Israel-USA Government Bonds 10 Years Spread 22 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. SOURCE: Bank of Israel
The Stock Markets: Israel, NASDAQ and the Emerging Markets(1/6/2006=100) Index Emerging Markets NASDAQ Israel (Tel Aviv 100) 23 SOURCE: Bloomberg