| Governor of the Bank of Israel Stanley Fischer opened his talk today at the Globes Israel Business Conference by commenting on the Globes Person of the Year, the late Eli Hurvitz. The Governor quoted from the "Israel 2028" report, the writing of which was led by Hurvitz and David Bordet three years ago. "An open and enlightened society will exist in the State of Israel, with a free, balanced and fair economy. The state will accomplish all this through the cooperation of all its sectors, while maintaining its values and strengthening Israel's image. The great challenges facing Israel do not allow it to wallow in mediocrity and yield on excellence. Adopting high standards in many and varied areas of life will bring us closer to being an exemplary society." The Governor said that these words reflect the vision and greatness of Eli Hurvitz, may his memory be a blessing. |
| The Governor then described the macroeconomic situation in Israel in the winter of 2011–12, referring to steps taken by Israel in the last crisis, and the lessons learned from those steps heading into the coming period for the Israeli and global economies. The following is an abstract of the Governor's comments: |
| Israel's economy is in a slowdown. The OECD forecasts 2.9 percent growth in 2012. The Bank of Israel forecast, published some time ago—at the end of September—was 3.2 percent, although it is reasonable to assume that the next forecast, which is currently being formulated, will be closer to the OECD forecast. In that case, the Israeli economy is experiencing a slowdown in the rate of growth—a slowdown which is expressed in a growth rate which in Europe may be considered impressive, but is not impressive for Israel's economy. While the unemployment rate is currently still low, we must remember that in the last crisis as well the increase in unemployment began with a lag, some time after the slowdown in GDP growth began. |
| What were the steps that we took in response to the last crisis? In the summer of 2008, inflation was very high, so the interest rate was relatively high. However, after the collapse of the Lehman Brothers investment bank, we understood that we were facing a crisis which was unlike any other since World War II, and we quickly reduced the interest rate to 0.5 percent. We left the interest rate at that level until August 2009, and we were among the first to increase the interest rate after the crisis, when we saw that Israel's economy was returning to growth. The interest rate continued to increase gradually until last summer, and recently we returned to reducing the interest rate in light of the deterioration in the economic situation in the world. It is interesting to note the monetary policy discussion which took place at the end of September, which was held by conference call because half the members of the monetary forum were in Washington and half were in Israel. Those who were in Washington supported reducing the interest rate, and those who were in Israel were in favor of leaving it unchanged, which perhaps represents the sense of an "island of stability" that we in Israel are living in. At the end, we reduced the interest rate, primarily because we forecast a slowdown in the rate of exports as a result of the state of the global economy. Recently, the rate of inflation entered the target range and it does not present a problem at this stage. |
| Another step we took as a response to the crisis was the intervention in the foreign exchange market, in light of the sharp appreciation in the shekel beginning in the middle of 2007. Foreign currency purchases led to depreciation of the shekel and contributed to exports falling less than imports in 2009. In the summer of 2009, we decided to end the regular intervention in the foreign exchange market and switched to intervening based on our consideration of market trends. In recent months, we did not need to intervene in the foreign exchange market, although our policy in this area has not changed, and we will intervene in the market if the need arises. |
| On the eve of the crisis, the Supervisor of Banks directed to increase the capital adequacy ratio in the banking system. This demand seemed extraordinary at that time, but today the supervisory authorities in Europe are also increasing the capital ratio targets, and we intend to bring the targets in Israel in line with the demands of Basel III. We will do this in a measured way, and as the Supervisor of Banks said yesterday, without harming the ability of the banks to support economic activity. |
| From the perspective of fiscal policy, the Olmert government was not able to approve the budget in 2008, and so there was no way to increase expenditure, and the entire increase in the deficit was a result of the operation of automatic stabilizers. As a result, we succeeded over the course of the recession to maintain a more or less stable level of the debt to GDP ratio. This fact is of special importance. Many countries find themselves today with a difficult problem in terms of public debt, and we mustn't think that the fact that in these countries the debt to GDP ratio is very high means that we can permit ourselves to increase the debt. |
| Steps were also taken in the capital markets. Investment funds were set up by the Ministry of Finance to deal with non-bank credit; government guarantees were granted for fundraising by banks in order to expand credit; and a framework was formulated to appoint credit officers to deal with problem loans. This process has perhaps yielded too much success—in any case, there is no doubt that the volume of debt settlements that we currently see is not optimal. Additional steps were also taken, by the government as well as by the Bank of Israel. |
| Last summer we saw the social protest, which raised issues that cannot be ignored onto the agenda. The government's response to the protest was appropriate and responsible, and the Trajtenberg Committee report suggests a responsible response to the demands of the protest, specifically in that it maintained the budgetary framework. We must remember that it is very easy to offer various routes of public spending, all of which appear crucial, but in the end we need to pay for them. The Trajtenberg report, in my opinion, is a comprehensive and professional report and it is important that it be implemented. |
| The lessons that can be learned from my review here are: (a) There are additional steps that can be used in time of need—but their time has not yet come. We need to know that they exist in our toolkit, and use them only when needed. (b) Israel's economy is in a relatively good state, but it is clear that there is a slowdown in growth. (c) Israel has enough maneuvering room to use expansionary monetary policy, and active and careful fiscal policy. |
| If we manage the economy responsibly and carefully, we will be able to get by this crisis as well at a relatively low cost and to deal with any problems that arrive from abroad to the shores of Israel—and we must prepare for the fact that problems are in fact likely to arrive here. |
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