Bank of Israel Governor Prof. Amir Yaron delivered remarks at the conference on “Access to Financial Services—Yesterday, Today, and Tomorrow” in memory of his father Yaakov Yaron.  The conference was held at the College of Management’s Academic Faculty of Business Management in Rishon Lezion.  The presentation that accompanied the Governor’s remarks (in Hebrew) is attached.


The Governor began his remarks by sharing stories of his father from a personal-family point of view, and also spoke of his professional work in academia, in the business sector, and at the World Bank in the US, where Yaakov Ron advanced the development of the SDI—an index of efficiency for microfinance banks that receive subsidies or discounted loans from the World Bank.  The index became an integral part of the considerations in providing loans in the microfinance field at the World Bank.


The Governor surveyed the macroeconomic situation and emphasized the global economy, the labor market in Israel, and the high-tech sector, and presented the Bank of Israel Research Department’s macroeconomic staff forecast.  He also touched upon the issue of accessible services and innovation in the banking and finance fields, which the conference also discussed at length.  The Governor expanded upon the monetary policy adopted by the Bank of Israel with the aim of mitigating inflation, while focusing on inflation’s stronger impact on the weaker segments of society.


Excerpts from the Governor’s remarks on monetary policy:


Inflation in Israel is high, and is above the upper bound of the target range.  Inflation in Israel is lower than in most countries in the world, however “core inflation” is closer to the average.  Inflation of the prices of tradable goods is in a downward trend, but inflation of the prices of nontradable goods continues to increase, and is not so far showing signs of decline.  Our analyses show that the lively demand in the economy accounts for a large part of the contribution to inflation.


Looking at shorter periods, and at a higher resolution at subcomponents, we can see that inflation is showing the initial signs of moderation.  These and other data are causing the various sources—economic forecasters, capital market participants, and others—to project that inflation will remain in its current environment—and perhaps even to increase slightly—in the coming quarter, but to moderate later on and to decline back to around the upper bound of the target range during the third quarter of the year.


We must remember that the interest rate increases thus far have been implemented relatively rapidly, and that their effect on inflation takes place with a delay of some time.  Moreover, in order to be certain that inflation is actually declining back to within the target range, it is reasonable to assume that we will see the interest rate at around 4 percent for some time.  This assessment reflects the main scenario.  If there are significant developments that increase inflationary processes, either on the part of the global economy or on the part of the domestic environment, the interest rate adopted as part of monetary policy may be even higher.  This is all because we have been, and remain, determined and committed to bring inflation back to the target range.


It is important for me to explain why it is so important to mitigate inflation, and why the Bank of Israel is acting steadfastly through the interest rate tool to bring inflation back within the target range.  Empirical studies have shown a positive correlation between inflation and inequality.  The correlation is, of course, not causal, but the literature indicates a number of explanations for why inflation increases inequality, particularly why inflation mainly harms the weaker population groups.  This is one of the reasons we have adopted the current policy.  So why really are the weaker population groups more hurt by inflation?


  1. The weaker groups spend more of their income on goods that cannot be as easily foregone or replaced. The consumption basket of households in the weaker population groups is composed more of basic consumption goods.  This means that foregoing them will lead to a very harsh impact on the quality of life.  For example, when prices increases, stronger households can allow themselves to forego a meal at an expensive restaurant or reduce their vacations in Israel or abroad.  Households in the weaker population groups, which mainly consumer basic goods such as food—will have greater difficulty cutting back.  In addition, the consumption basket of stronger households is more diverse and enables greater replacement of products.
  2. Current consumption as a share of household income is greater in the lower income deciles. Relatively weak households spend a greater portion of their income on their consumption basket, so inflation—an increase in the cost of the consumption basket—has a greater impact on them.
  3. Less access to financial products that compensate for inflation. There are a number of causes of this.  For instance, low financial literacy, which causes households from weaker population groups to have less access to financial assets such as investment products or bank deposits, and these households’ existing money tends to stay in their current accounts or in cash.
  4. Bargaining power regarding wages is lower, such that the nominal wage adjusts itself with a greater lag and real wages deteriorate more. An example of this is the minimum wage, the nominal value of which has not changed in recent years.  As such, its real value has eroded.  At the same time, real wages in the business sector have increased in recent years.


These are, of course, only some of the reasons for adopting a monetary policy that aims to stabilize prices.


Price stability is the basis for having a stable economy and creating an environment in which there is sufficient certainty for advancing investments and making transactions that are so important to economic growth.  We will continue to do so while constantly monitoring the various economic developments, with the aim of ensuring that the necessary price stability exists in Israel.


In his speech, Governor Yaron also discussed the economic measures presented yesterday evening, and the issue of the cost of living:


“The measures unveiled yesterday evening to moderate the price increases for electricity, water, and municipal tax are reasonable, given that we are talking about temporary measures the cost of which is covered by distinct budgetary sources, while the institutional framework of setting water and electricity prices by the relevant authorities is maintained.


“It is important to remember that the best way to deal with the cost of living is to advance structural reforms that encourage competition in the various markets.  This is a long process that requires professional and in-depth staff work, and in order to implement it, we need to be uncompromisingly persistent.  I was pleased yesterday to hear the commitment of the Prime Minister and the Minister of Finance to these processes of encouraging competition, opening the markets, and reducing excess regulation.


“During the past two months, we have been working on formulating recommendations for policies that will ensure long-term sustainable growth in the Israeli economy.  These recommendations will soon be presented to the government.  The struggle against the increased cost of living is one of the issues covered by the recommendations.  Among other things, we are recommending a series of measures to remove barriers, which will lead to easing the import process and increased competition among importers and between them and domestic producers.


“With regarding to fiscal policy, it is important for the new government to act with the necessary responsibility, mainly with regard to expenditures that have a designated aim that is not support of sustainable growth.  I have previous said that one of Israel’s strategic assets is the economy’s low debt to GDP ratio, which has served us well even during the COVID-19 crisis.


“In this context, I note that I was happy to hear the Minister of Finance’s statement of recent days that it is important to maintain the fiscal framework and consistency between fiscal and monetary policies.”



Pictures are attached.  Credit: College of Management