Monetary Policy and Financial
Stability Policies in Israel
Presented at Economic
Dialogue Meeting
by
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
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
Thanks
GDP Growth Rates in Israel and
in the Advanced Economies
%
(2000-2011)
9.3
10
7.2
8
6
4.1
3.2
4
2.1
2.0
2
1.91.5
5.6
4.9
4.8
3.4
2.5
5.5
5.6
5.4
4.0
0.6
3.8
3.5
3.1
5.9
5.0
4.8
2.2
1.7
1.1
0.3
3.0
1.8
4.7
3.7
3.5 3.4
1.7
1.6
1.6
1.5
0
-0.2 -0.6
-2
-0.5
-0.6
-2.2
-4
-6
-2.1
1.4
-2.7
Advanced Economies
-8
-7.9 -8.0
Israel
20 08
08
2 0 Q1
08
2 0 Q2
08
2 0 Q3
08
2 0 Q4
09
2 0 Q1
09
2 0 Q2
09
2 0 Q3
09
2 0 Q4
10
2 0 Q1
10
2 0 Q2
10
2 0 Q3
10
2 0 Q4
11
2 0 Q1
11
2 0 Q2
11
Q
3
07
20
20
06
20
05
04
20
20
03
20
02
20
01
20
20
00
-10
-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)
%
10
9.3
8
6
4.8
4.9
5.6
5.5
4.8
4.8
4.0
4
2.8
1.5
2
0.8
-0.6
0
-0.2
Bank of Israel forecasts for 2012
2012F
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-2
9
Goods imports and exports*
(2000–2011)
$ millions
5,000
4,500
4,000
Goods Exports
3,500
3,000
2,500
Goods Imports
2,000
1,500
01
/0
07 0
/0
01 0
/0
07 1
/0
01 1
/0
07 2
/0
01 2
/0
07 3
/0
01 3
/0
07 4
/0
01 4
/0
07 5
/0
01 5
/0
07 6
/0
01 6
/0
07 7
/0
01 7
/0
07 8
/0
01 8
/0
07 9
/0
01 9
/1
07 0
/1
01 0
/1
07 1
/1
1
1,000
* Monthly figures, $ million, at current prices. Imports and exports excluding airplanes, ships and diamonds.
10
SOURCE: Bank of Israel.
Main labor market Indicators
(Quarterly data, seasonally adujsted,1997-2011)
%
%
12
57.4
59
11
57
10
54.2
9
53
8
51
7
6
55
49
5.6
Unemployment Rate
Participation Rate
Employment Rate
45
19
97
19
98
19
99
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
10
5
47
SOURCE: Based on Central Bureau of Statistics Labour Force Survey.
11
Real Wage per Employee Post*
(1999-2011)
7700
7200
6700
6200
Total
Public services
Business sector
1/
99
7/
99
1/
00
7/
00
1/
01
7/
01
1/
02
7/
02
1/
03
7/
03
1/
04
7/
04
1/
05
7/
05
1/
06
7/
06
1/
07
7/
07
1/
08
7/
08
1/
09
7/
09
1/
10
7/
10
1/
11
5700
*Seasonally adjusted, 3 months moving average. 2004 prices.
SOURCE: Based on Central Bureau of Statistics Data.
12
Current Account of Balance of Payments
(Percentage of GDP, 1995-2011)
%
6
4.8
4
3.6
3.1
2.9
2.7
1.7
2
0.9
0.5
0.3
0
-0.9
-2
-1.7 -1.6 -1.7
-3.0
-4
SOURCE: Balance of Payments, Central Bureau of Statistics.
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
-5.0 -4.9
1995
-6
-1.1
13
Budget Deficit*
(Percent of GDP, 2000-2012**)
%
7
Deficit Target
Actual Deficit
6.0
5.8
6
5.5
5.0
5.0
4.0 3.9
5
4.0 4.0
3.6
3.4
3.4
3.0
3.0
3.0
4
3.5
3.2
2.9
3
2.4
2.0
2.0
1.8
2
1.6
1.4
1.0
1
0.2
0
00
0
2
01
0
2
02
0
2
03
0
2
04
0
2
05
0
2
06
0
2
07
0
2
08
0
2
09
0
2
10
0
2
1F
2T
1
1
20
20
*Percent of GDP; excluding credit extended. The data refers to the deficit excluding the Bank of Israel’s profits.
14
**2011 and 2012 Budget deficit is based on the current budget and BOI forecast.
Budget Deficit*
(Percent of GDP, 2000-2012**)
%
7
Deficit Target
Actual Deficit
6.0
5.8
6
5.5
5.0
5.0
4.0 3.9
5
4.0 4.0
3.6
3.4
3.4
3.0
3.0
3.0
4
3.5
3.2
2.9
3
2.4
2.0
1.8
2.0
2
1.6
1.4
1.0
1
0.2
0
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
1F
2T
1
1
20
20
20
*Percent of GDP; excluding credit extended. The data refers to the deficit excluding the Bank of Israel’s profits.
43
**2011 and 2012 Budget deficit is based on the current budget and BOI forecast.
Gross Public Debt
(Percent of GDP, 2000-2012F)
%
96.7
100
99.3
97.7
93.7
89.0
84.3
84.7
78.1
80
77.0
79.4
76.1
75.3
75.5
60
40
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F
*Bank of Israel forecast
16
M
ex
ic
ni
te C o
d hi
St le
at
K es
o
Sl
Tu rea
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r
ak Ir key
R el
Sw ep and
itz ub
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la
G nd
re
C ec
a e
N Po nad
ew rt a
Ze uga
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an
Sp d
a
Is in
Es rae
C
to l
z
U ech O nia
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te e C
d p D
K ub
in li
gd c
Ic om
e
Lu Ge lan
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m an
b y
H ou
un r g
Sl ga
ov ry
e
A nia
us
Fi tri
n a
N lan
or d
w
Fr ay
an
ce
B Ita
el ly
g
Sw ium
D ed
en en
m
ar
k
U
The Tax Burden in Israel
and in the OECD Countries
(Percent of GDP, 2010)
%
50
40
32.3
34.2
30
20
10
0
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)
6
5
Inflation expectations
4
3
2
1
0
-1
Actual inflation
Bank of Israel interest rate
-2
01
/0
4
05
/0
4
09
/0
4
01
/0
5
05
/0
5
09
/0
5
01
/0
6
05
/0
6
09
/0
6
01
/0
7
05
/0
7
09
/0
7
01
/0
8
05
/0
8
09
/0
8
01
/0
9
05
/0
9
09
/0
9
01
/1
0
05
/1
0
09
/1
0
01
/1
1
05
/1
1
09
/1
1
01
/1
2
-3
* 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(
%
11
9
7
Consumer price
index
5
3
1
-1
Inflation
expectations
01
/9
7
09
/9
7
05
/9
8
01
/9
9
09
/9
9
05
/0
0
01
/0
1
09
/0
1
05
/0
2
01
/0
3
09
/0
3
05
/0
4
01
/0
5
09
/0
5
05
/0
6
01
/0
7
09
/0
7
05
/0
8
01
/0
9
09
/0
9
05
/1
0
01
/1
1
09
/1
1
-3
19
SOURCE: Research Department, Bank of Israel
10 Year Break-Even Inflation Expectations*
(2001-2012)
%
7
6
5
4
3
2
1
05
/0
1
11
/0
1
05
/0
2
11
/0
2
05
/0
3
11
/0
3
05
/0
4
11
/0
4
05
/0
5
11
/0
5
05
/0
6
11
/0
6
05
/0
7
11
/0
7
05
/0
8
11
/0
8
05
/0
9
11
/0
9
05
/1
0
11
/1
0
05
/1
1
11
/1
1
0
10 years average Inflation Expectation.
SOURCE: Research Department, Bank of Israel
20
The Nominal and the Real Exchange Rates
(1997-2012)
NIS
5.0
4.8
4.6
4.4
4.2
4.0
3.8
3.6
3.4
3.2
3.0
3.8
Shekel / Dollar Exchange Rate
5.0
4.8
4.6
4.4
4.2
4.0
3.8
3.6
3.4
3.2
3.0
1/
97
7/
97
1/
98
7/
98
1/
99
7/
99
1/
00
7/
00
1/
01
7/
01
1/
02
7/
02
1/
03
7/
03
1/
04
7/
04
1/
05
7/
05
1/
06
7/
06
1/
07
7/
07
1/
08
7/
08
1/
09
7/
09
1/
10
7/
10
1/
11
7/
11
1/
12
Index
The Real Exchange Rate by
Trading Partners
)01/1997=100(
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
01
/9
7
07
/9
7
01
/9
8
07
/9
8
01
/9
9
07
/9
9
01
/0
0
07
/0
0
01
/0
1
07
/0
1
01
/0
2
07
/0
2
01
/0
3
07
/0
3
01
/0
4
07
/0
4
01
/0
5
07
/0
5
01
/0
6
07
/0
6
01
/0
7
07
/0
7
01
/0
8
07
/0
8
01
/0
9
07
/0
9
01
/1
0
07
/1
0
01
/1
1
07
/1
1
135
130
125
120
115
110
105
100
95
90
Ø The NIS/$ chart is on a daily basis, while the real exchange rate chart is on a monthly basis.
21
135
130
125
120
115
110
105
100
95
90
10 Year Israel-US Gov. Bond Spread
and EMBI+ Index
)2006-2012, Basis points(
750
650
550
EMBI +
Israel-USA Government
Bonds 10 Years Spread
450
350
250
150
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
2
1
/1
1
0
1
0
/1
1
1
/1
7
0
0
4
/1
1
0
/1
0
1
/1
0
1
0
/1
0
7
0
0
4
/1
0
9
/1
0
1
/0
9
1
0
/0
9
0
7
/0
9
0
4
/0
8
0
1
/0
8
1
0
/0
8
0
7
/0
8
0
4
/0
7
0
1
/0
7
1
0
/0
7
0
7
/0
7
0
4
/0
6
0
1
/0
6
1
0
/0
6
7
/0
0
4
0
0
1
/0
6
50
22
06
/0
07 6
/0
09 6
/0
11 6
/0
01 6
/0
03 7
/0
05 7
/0
07 7
/0
09 7
/0
11 7
/0
01 7
/0
03 8
/0
05 8
/0
07 8
/0
09 8
/0
11 8
/0
01 8
/0
03 9
/0
05 9
/0
07 9
/0
09 9
/0
11 9
/0
01 9
/1
03 0
/1
05 0
/1
07 0
/1
09 0
/1
11 0
/1
01 0
/1
03 1
/1
05 1
/1
07 1
/1
09 1
/1
11 1
/1
01 1
/1
2
The Stock Markets: Israel, NASDAQ and the
Emerging Markets
Index
95
SOURCE: Bloomberg
(1/6/2006=100)
175
165
155
Emerging Markets
145
135
125
115
105
NASDAQ
Israel (Tel Aviv 100)
85
75
65
55
23
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)
Main labor market Indicators
(Quarterly data, seasonally adujsted,1997-2011)
%
%
12
57.4
11
59
57
10
54.2
9
53
8
51
7
6
55
49
Unemployment Rate
Participation Rate
5.6
Employment Rate
45
19
97
19
98
19
99
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
10
5
47
SOURCE: Based on Central Bureau of Statistics Labour Force Survey.
80
Budget Deficit*
(Percent of GDP, 2000-2012**)
%
7
Deficit Target
Actual Deficit
6.0
5.8
6
5.5
5.0
5.0
4.0 3.9
5
4.0 4.0
3.6
3.4
3.4
3.0
3.0
3.0
4
3.5
3.2
2.9
3
2.4
2.0
2.0
1.8
2
1.6
1.4
1.0
1
0.2
0
00
0
2
01
0
2
02
0
2
03
0
2
04
0
2
05
0
2
06
0
2
07
0
2
08
0
2
09
0
2
10
0
2
F
T
11
12
0
0
2
2
*Percent of GDP; excluding credit extended. The data refers to the deficit excluding the Bank of Israel’s profits.
43
**2011 and 2012 Budget deficit is based on the current budget and BOI forecast.
Real Price of Housing (Relative to the CPI)
Jan. 1973 - Oct. 2011, Index, Jan. 2000 = 1
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Jan-11
Jan-09
Jan-07
Jan-05
Jan-03
Jan-01
Jan-99
Jan-97
Jan-95
Jan-93
Jan-91
Jan-89
Jan-87
Jan-85
Jan-83
Jan-81
Jan-79
Jan-77
Jan-75
Jan-73
Credit Balances Outstanding
(2006-2011, NIS Billion)