Monetary Policy and Financial Stability Policies in Israel
Presented at Economic Presented at Economic Dialogue MeetingDialogue Meeting
byby
Dr. Edward OffenbacherDr. Edward OffenbacherDirector, Monetary/Finance Director, Monetary/Finance
Division, Research DeptDivision, Research Dept..Bank Of IsraelBank Of Israel
January 2012January 2012
Outline of Presentation
Key Macroeconomic DevelopmentsKey Macroeconomic Developments
Issues for Monetary PolicyIssues for Monetary Policy
Issues for Financial StabilityIssues 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 Growth slowdown w/ economy near full employment: weak demand side or supply employment: weak demand side or supply constraints? Where is relevant potential output?constraints? Where is relevant potential output?
Slowing inflation: one-time effects or indicator of Slowing inflation: one-time effects or indicator of recession ahead? Why is wage growth subdued?recession ahead? Why is wage growth subdued?
Interest rate differentials: Potential for capital Interest rate differentials: Potential for capital inflow, local currency appreciation (on hold inflow, local currency appreciation (on hold recently).recently).
Complaints of Complaints of ““credit crunchcredit crunch”” –– how legitimate? how legitimate?
Financial Stability Policy Issues (1)
Financial stability policy (aka Macroprudential Financial stability policy (aka Macroprudential Policy): Do we know what it is? Do we have relevant Policy): Do we know what it is? Do we have relevant information and analysis information and analysis –– in the profession, in in the profession, in Israel? Contagion/network effects; Israel? Contagion/network effects; credibility/confidence.credibility/confidence.
Key measues taken in Israel: (a) Capital surcharge Key measues taken in Israel: (a) Capital surcharge on high LTV mortgages; (b) Limits on variable rate on high LTV mortgages; (b) Limits on variable rate mortgages; (c) Reporting/reserve requirements on mortgages; (c) Reporting/reserve requirements on foreign activity in Makam and derivatives; (d) foreign activity in Makam and derivatives; (d) Elimination of tax exemption for foreigners on Elimination of tax exemption for foreigners on Makam interest. Makam interest.
Key new measure: adoption of Basel III Tier 1 capital Key new measure: adoption of Basel III Tier 1 capital adequacy requirements for banks. 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
8
GDP Growth Rates in Israel andGDP Growth Rates in Israel and in the Advanced Economies in the Advanced Economies
(2000-2011)(2000-2011)
4.1
2.1 2.0 1.9
3.22.5
3.4 3.1
0.6 0.3
-0.6
-2.2
-7.9 -8.0
-0.5
3.7
1.6 1.5
9.3
-0.2 -0.6
1.5
4.8 4.95.6 5.5
4.0
5.4
3.5
1.1
-2.1-2.7
1.7
3.84.8
5.6 5.95.0
7.2
4.7
3.5 3.4
1.6
1.4
1.73.0
1.82.2
-10
-8
-6
-4
-2
0
2
4
6
8
10
Advanced Economies
Israel
%
-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
9
%
Israel’s Annual GDP Growth RatesIsrael’s Annual GDP Growth Rates))20002000 – – 2012F2012F((
Bank of Israel forecasts for 2012
2.8
4.84.8
0.8
4.0
5.55.64.94.8
1.5
-0.6
-0.2
9.3
-2
0
2
4
6
8
10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
F
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
01/0
007
/0001
/0107
/0101
/0207
/0201
/0307
/0301
/0407
/0401
/0507
/0501
/0607
/0601
/0707
/0701
/0807
/0801
/0907
/0901
/1007
/1001
/1107
/11
10
Goods imports and exports*(2000–2011)
* Monthly figures, $ million, at current prices. Imports and exports excluding airplanes, ships and diamonds.SOURCE: Bank of Israel.
Goods Exports
Goods Imports
$millions $millions
11
Main labor market Indicators (Quarterly data, seasonally adujsted,1997-2011)
%
SOURCE: Based on Central Bureau of Statistics Labour Force Survey.
57.4
5.6
%
54.2
5
6
7
8
9
10
11
12
45
47
49
51
53
55
57
59
Unemployment Rate Participation Rate Employment Rate
12
Real Wage per Employee PostReal Wage per Employee Post**))1999-20111999-2011((
*Seasonally adjusted, 3 months moving average. 2004 prices.
5700
6200
6700
7200
7700
Total Public services Business sector
SOURCE: Based on Central Bureau of Statistics Data.
13
-5.0 -4.9
-3.0
-0.9
-1.7 -1.6 -1.7-1.1
0.5
1.7
3.1
0.9
3.62.9
0.3
2.7
4.8
-6
-4
-2
0
2
4
6
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Current Account of Balance of PaymentsCurrent Account of Balance of Payments(Percentage of GDP, 1995-2011)(Percentage of GDP, 1995-2011)
SOURCE: Balance of Payments, Central Bureau of Statistics.
%
14
%
Budget Deficit** (Percent of GDP, 2000-2012**)
*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.
3.53.2
2.0
3.0
3.6
1.8
3.9
3.0
4.0
3.43.0 2.9
1.6
6.0
5.5
1.4
4.0
5.0
5.8
4.0
2.4
1.0
0.2
2.0
5.0
3.4
0
1
2
3
4
5
6
7Deficit Target Actual Deficit
43
%
Budget Deficit**(Percent of GDP, 2000-2012**)
*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.
3.53.2
2.0
3.0
3.6
1.8
3.9
3.0
4.0
3.43.0 2.9
1.6
6.0
5.5
1.4
4.0
5.0
5.8
4.0
2.4
1.0
0.2
2.0
5.0
3.4
0
1
2
3
4
5
6
7Deficit Target Actual Deficit
16
%
Gross Public DebtGross Public Debt((Percent of GDP, 2000-2012F) 2000-2012F)
*Bank of Israel forecast
84.389.0
99.393.7
84.779.4 76.1 75.3 75.5
96.7 97.7
77.078.1
0
20
40
60
80
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F
17
34.232.3
0
10
20
30
40
50
Mex
icoChile
United S
tate
s
Korea
Turkey
Irela
nd
Slova
k Rep
ublic
Switz
erla
nd
Greec
e
Canad
a
Portugal
New Z
eala
nd
SpainIs
rael
Estonia
OECD
Czech
Rep
ublic
United K
ingdom
Icel
and
Germ
any
Luxem
bourg
Hungary
Slove
nia
Austria
Finla
nd
Norway
France
Italy
Belgiu
m
Swed
en
Denm
ark
The Tax Burden in Israel The Tax Burden in Israel and in the OECD Countries and in the OECD Countries
(Percent of GDP, 2010)(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
%
18
-3
-2
-1
0
1
2
3
4
5
6
Bank of Israel interest rateActual inflation
%
Inflation expectations
The Bank of Israel Interest Rate, Actual Inflation,* and Inflation Expectations**
) 2004–12(
*In the previous twelve months. **Twelve months forward, calculated form the capital market.
SOURCE: Bank of Israel.
19
Inflation Over Past 12 Months, Inflation TargetsInflation Over Past 12 Months, Inflation Targets
and Inflation Expectations from the Capital Marketand Inflation Expectations from the Capital Market ))1997-20111997-2011((
-3
-1
1
3
5
7
9
11
Inflation expectations
Consumer price index
SOURCE: Research Department, Bank of Israel
%
20
1010 Year Break-Even Inflation Expectations*Year Break-Even Inflation Expectations* (2001-2012)(2001-2012)
0
1
2
3
4
5
6
7%
10 years average Inflation Expectation.
SOURCE: Research Department, Bank of Israel
21
90
95
100
105
110
115
120
125
130
135
90
95
100
105
110
115
120
125
130
135
3.0
3.23.4
3.6
3.84.0
4.2
4.4
4.64.8
5.0
3.0
3.23.4
3.6
3.84.0
4.2
4.4
4.64.8
5.0
The Nominal and the Real Exchange RatesThe Nominal and the Real Exchange Rates(1997-2012)(1997-2012)
Shekel / Dollar Exchange Rate
The Real Exchange Rate by
Trading Partners (100=01/1997) 111.8
NIS
Ø The NIS/$ chart is on a daily basis, while the real exchange rate chart is on a monthly basis.
•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
Index
3.8
22The 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
10 Year Israel-US Gov. Bond Spread
and EMBI+ Index (Basis points 2006-2012,)
50
150
250
350
450
550
650
750
EMBI+ Israel-USA Government Bonds 10 Years Spread
23
The Stock Markets: Israel, NASDAQ and the Emerging Markets
(1/6/2006=100)
55
65
75
85
95
105
115
125
135
145
155
165
175
Emerging Markets
Israel (Tel Aviv 100)
NASDAQ
SOURCE: Bloomberg
Index
Credit Balances OutstandingCredit Balances Outstanding(2006-2011, NIS Billion)(2006-2011, NIS Billion)
Credit from the Banking SectorCredit from the Banking Sector(2006-2011, NIS Billion)(2006-2011, NIS Billion)
Credit to the Business SectorCredit to the Business Sector(2006-2011, NIS Billion)(2006-2011, NIS Billion)
80
Main labor market Indicators(Quarterly data, seasonally adujsted,1997-2011)
%
5
6
7
8
9
10
11
12
45
47
49
51
53
55
57
59
Unemployment Rate Participation Rate Employment Rate
SOURCE: Based on Central Bureau of Statistics Labour Force Survey.
54.2
%
57.4
5.6
43
%
Budget Deficit**(Percent of GDP, 2000-2012**)
*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.
3.53.2
2.0
3.0
3.6
1.8
3.9
3.0
4.0
3.43.0 2.9
1.6
6.0
5.5
1.4
4.0
5.0
5.8
4.0
2.4
1.0
0.2
2.0
5.0
3.4
0
1
2
3
4
5
6
7Deficit Target Actual Deficit
Real Price of Housing (Relative to the CPI)Jan. 1973 - Oct. 2011, Index, Jan. 2000 = 1
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Jan-73
Jan-75
Jan-77
Jan-79
Jan-81
Jan-83
Jan-85
Jan-87
Jan-89
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11