BoI Governor: Israel won’t avoid slowdown

Governor of the Bank of Israel Amir Yaron was a guest at last night’s gala opening of the 2022 Globes Israel Business Conference. In conversation with Globes Editor in Chief Naama Sikuler, Yaron said that sharp interest rate hikes could be expected on the way to the level forecast by the Bank of Israel’s Research Department.

“The bank’s Research Department forecasts an interest rate of 3.5% from the middle of the third quarter of 2023. I think that this is a reasonable environment, and I don’t think that progress towards it will be linear, but accelerated.,” Yaron said. “We examine ourselves all the time, and we understand that this process is painful and chiefly hurts the weaker strata of society. We have various tools, such as the credit database, and we look to see what the significance for people will be of raising interest rates, from the point of view of mortgages and so on.”

Did you not act too late to curb inflation?

“It can be seen that we moved relatively fast in relation to the level of inflation, because it’s fairly low here. I have been asked why we aren’t like Hungary or Poland. These countries had to move fast to prevent capital flight, and they started to act even before the US, and even swam against the tide, and so the interest rate hikes there were not effective.

“We had many programs during the coronavirus pandemic. We were well ahead of the Fed, and you have to understand that monetary policy isn’t just interest rates. We bought bonds to the tune of NIS 85 billion. We gave loans to the banks. As early as May 2021, we saw that the Israeli economy was in good shape, and we halted these things in June ’21, and stopped purchases of government bonds last October, a long time before the Americans. We saw that the direction was going to change early in 2022, and we started to act in April. Meanwhile the war started in Ukraine, and we switched from a gradual process to a faster one.

“This led to front loading, and there’s no getting away from it, central banks have to adapt to the situation. A change took place that obliged us to move faster, and the interest rate hikes were steeper, because we believe that this process will avert the need to raise the interest rate to a higher point.”

Pessimism at IMF

Yaron recently returned from the annual meetings of the International Monetary Fund (IMF), and he spoke of the pessimism among those attending. “The pessimism was palpable. The geopolitical situation – the war between Ukraine and Russia, relations between the US and China, the whole microchips saga – all this comes together with the energy crisis that of course affects everybody, especially Europe. If until not long ago we listened to doctors to know what would happen with Covid-19, now we go to hear what the meteorologists have to say, because if there is a hard winter, countries like Germany and Italy will have to introduce energy rationing and make tough decisions on the question whether people will be cold at home,” Yaron said.

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“I must say that in this context Israel looked like a boring country, in a good sense. I talked with the most senior officials, and I felt like the child who’s told to stop complaining about a mark of 97. So everything is relative. There are structural problems, but in comparison with European countries with double-digit inflation and questions such as whether homes will have heating or not, we’re in a pretty good position.”

Is the US on the way to a recession?

“There are two schools of thought. There are those who say that the Fed talks of raising its interest rate to 4.5% by the end of the year, with unemployment not rising much, and there are those who say that this won’t be enough to bring down inflation, and the hit will be substantially worse. On the other hand, there’s another line of argument that says that inflation is on the way down, and that the Fed is now doing too much, and so it is actually this that will cause a slowdown. In the end, unemployment will have to be higher than it is today. But in a world of very great uncertainty, whether there’s a recession or a soft landing depends on many external factors.”

What about Israel?

“It’s clear to everyone that we’re not on Robinson Crusoe’s island. The economy here is very strong. In the pandemic period it shrank by 2.2%; in 2021 we grew by more than 8%. Today, the figures indicate that we’re slowing down, and we’ll end 2022 with 6%. In 2023, we’ll reach 3%, which compares with forecasts for Europe of 0.5% and perhaps even less, especially if there’s a hard winter. But it all depends on what happens in Europe and to what extent the US economy slows down. We currently estimate that for every unemployed person there’s a job vacancy, and the slowdown here could be very different from other countries where there’s zero or negative growth.”

On the housing market, we hear estimates from the Ministry of Finance that home prices are moderating. We’re seeing growth in supply, but no effect on prices. What’s your forecast?

“The figures show a glimmer of optimism in the sense that we’re seeing building starts, 72,000 starts, which is historically very high. That’s very important. In the end, prices are a question of supply and demand. Demand has also moderated by virtue of the rise in interest rates. Some of what we’re seeing is a diversion to renting, and that brings us back to inflation, and we estimate that there will certainly be a moderation in this market. There are demographics that they don’t have in other countries, such as a high birth rate and high demand from young couples. If we see the growth in supply continue, we’ll see prices moderating, and if not, it won’t happen.”

What harm, if any, do you see in another election campaign, and has the Bank of Israel’s role as economic adviser not been eroded in the past few years?

“The immediate cost of the election is a few hundred million. The loss of revenue from election day being a non-working day is not the big issue. The big cost is of uncertainty as far as multi-year planning is concerned. There’s a huge planning shortfall. This is the greatest harm. We’re good at the 110 meter hurdles, but not at the ten thousand meters. We have come through all these crises well, but we’re not managing to close planning gaps, and, on the social side, to bring sections of the population in the periphery into the game. Everyone is familiar with the transport issue. On the cost of living too, there’s no hocus pocus, but a need for change through reforms.”

The Globes Israel Business Conference is held in cooperation with Bank Hapoalim, with sponsorship from The Phoenix Holdings, Amdocs, BDO, HOT, Geely, Shufersal, El Al, Tnuva, Profimex, The Israel Medical Association, My Desk, Contigo, and Cisco, and with the participation of Mekorot, the Israel Innovation Authority, Mobileye, Startup Nation Central, The Port of Ashdod, and Israel Electric Corporation.

Published by Globes, Israel business news – en.globes.co.il – on October 26, 2022.

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