The governor of the Bank of Israel, Prof. Amir Yaron, was a guest at the gala evening of the Globes business conference, and in a conversation with Globes editor Naama Sikular, he said that the upcoming interest rate hikes are expected to be sharp on the way to the target predicted by the central bank’s research division.
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“The bank’s research division predicts an interest rate of 3.5% from the middle of the third quarter of 2023. I think this is a reasonable environment and I don’t think the focus there will be linear but more accelerated,” the governor said in an interview to Naama Sikular, editor-in-chief of Globes. “We constantly check ourselves and understand that this process is painful and mainly hurts the weaker sections. We have various tools, such as the credit data database, and we look at what the interest rate increase means for people, in terms of mortgages and the like.”
As for the additional interest rate hikes planned by the Fed, the US central bank, Yaron mentioned that the last forecast was for an interest rate of 4.4% at the end of 2022, after which moderation would come. “What the Fed will do after 2022 will greatly depend on the data they see before them. If they see a rapid moderation in inflation, they will probably stop there, but if inflation becomes more ‘sticky’ and continues to be reflected in the increase in rental prices, wages and services, they will have to be more aggressive. This is on the assumption that something tectonic will not happen geopolitically or in the markets.
Didn’t you act too late to moderate inflation?
“You see that relatively speaking we moved very quickly in relation to the level of inflation, because with us it is relatively low and certainly in relation to the deviation from inflation. We were asked why we are not like Hungary or Poland. These countries had to move quickly so that they would not have capital flight and they started acting even before the USA” And even you went against the flow, so the interest rate increases there were not effective.”
“We had many plans that we made during the Corona virus. We were long before the Fed and you have to understand that monetary policy is not just interest. We bought bonds for NIS 85 billion. We gave a loan to the banks. We already recognized in May 21 that the Israeli economy was in good shape and we closed these things in June 21 and we finished the purchase of the government bonds last October, long before the Americans. We saw that we were going to change direction at the beginning of 22 and we started to act in April. Along the way the war in Ukraine entered and we went from a gradual process to a more accelerated process. This led to front loading and there is nothing to be done, central banks have to be adaptive to the situation. There was a change that required us to move faster and the interest rate hikes were faster, because we believe that this process will avoid the need to raise the interest rate to a point higher than the one we would have had to if we had not done so all these actions”.
Pessimism at the IMF conference
In the last few days, the governor returned from a conference of the International Monetary Fund, and told about the pessimism that arose from the conference island. “The pessimism was really there. The geopolitical situation – the war between Ukraine and Russia, the relationship between the US and China and the whole issue of chips. This is accompanied by an energy crisis which of course affects everyone and especially Europe. If until recently we listened to the doctors to know what would happen with the corona virus, now we are going to listen to what the meteorologists have to say because if there is a severe winter, countries like Germany and Italy will have to reach rationing and make difficult decisions regarding the question of whether people will be cold at home,” Yaron said.
According to him, of course another issue that came up for discussion is the rising inflation. “Here, too, there is a difference between Europe, which is more exposed, and the US, where inflation is more sticky. Following what happened in Great Britain and the resignation of Prime Minister Liz Truss, the concept of financial risks outside the banking system came up and the question arose as to whether they would spill over into the banking system. There was also a lot of talk about developing countries and their large dollar debt and if they would be able to meet it.”
You talked about the pessimism.
“I want to say that Israel appeared in this context as a boring country in the best sense. I talk to the most senior and I felt like a child complaining and being told to stop complaining about a score of 97. So everything is relative, there are structural problems but in relation to European countries with double-digit inflation and issues of whether there will be heating or It won’t happen, we’re on a relatively good side.”
Some say that the current crisis will be worse than the crisis of the 1970s and 2008 combined. What is your forecast for the American economy and, by extension, for the Israeli economy?
“Regarding the first part of the sentence, I think it should be understood that with all the risks that are seen, both households and the financial system enter the event in a much better and more stable situation with a much larger cushion. The American economy is strong. Housing prices are falling there, prices of consumer goods such as Refrigerators are starting to decline. The initial situation of households and companies is good.”
Are they headed for recession?
“There are two schools of thought here. Some say that the Fed is talking about raising interest rates to 4.5% by the end of 2022 with unemployment not rising much. There are schools of thought that say that this will not be enough to lower inflation and then the damage will be more substantial. On the other hand, there is another direction that says everything they said Regarding prices falling, inflation is falling, and the Fed is already doing too much, so this will actually cause a slowdown. So eventually unemployment will have to be higher than it is today. But in a world of great uncertainty, whether there will be a recession or a soft landing depends on many factors external”.
What about Israel?
It is clear to everyone that we are not on Robinson Crusoe’s island. The economy here is very strong. During the Corona period we contracted by 2.2%, in 2021 we grew by over 8%. Today the data show that we are in the direction of slowing down and will end the year 2022 with 6 percent. We will reach 23 to 3 percent compared to the forecasts for Europe with half a percent and Europe even less if it was a hard winter. So it is true that three percent is a little above the pontifical growth. But it depends on what will happen in Europe and how much the Ikea economy will moderate, but our assessment is that today there is a vacancy for every unemployed person and it is possible that this moderation will be relatively very different from the other countries where there is zero growth or negative growth.
The central banks – are the voices increasing that the central banks reacted late to everything that is happening?
We live in a world where the Hungarian cube has more than six wigs and things change very quickly. I think you could say that the shift was over-optimism that supply chain problems would disappear quickly. A second time, the scope of the fiscal compromise was very large. In Israel during Corona there was 6.5 percent of GDP in the US it was almost double digit 15 percent. This is fiscal aid that went into the pockets of the guests and it also led to an increase in prices and in Jerusalem. In both of these things the inflation there was over-optimism about the supply chains and perhaps an insufficient diagnosis of the fiscal. The third thing Adding big fuel to the inflation fire is Ukraine Russia. Not that I have to be on the Fed’s side but we might not have reached 9.1 percent inflation and it might be that this procedure would have been limited.
An environment of zero interest rates not normal for the economy?
You have to remember the positive side of what happened in Corona. If I go back to the same Nobel Prize, the crisis that is big are financial crises that are together with real crises because the financial intermediation system is built on information systems and when they are broken the ability to return the economy to the viability of the Zen Hall and prolongs. So in Corona, they cut their line and also lowered interest rates.
In the context of Israel, we had many plans that we made during the Corona period. We were a lot of Fed changers. Taxis are not just interest. We bought Agag for NIS 85 billion. Nano loan to banks. We already recognized on May 21 that the Israeli stock market is in good shape. We closed these things on June 21 and the government bond ran out in October in the face of many Americans. The bank that can change direction at the beginning of 22 and we started to change it in Emril. What entered is Ukraine and we moved from a gradual process to a more accelerated process. This led to front loading and there is nothing to be done central banks need to be adaptive to the situation. There was a change that required us to move faster and the interest rate increases were faster because we believe that this process will prevent the need to raise the interest rate to a higher point if we did not.
Let’s look ahead – can we talk about the rate of interest rate increases?
The Federal Bank gives a detailed forecast for the interest rate of the committee members for Sukh 22 and Sukh 23. The last forecast was for a median of 4.4 at the end of 22 and then every 3.6. What they will do after 22 will very much depend on the data they see in front of them. If they see a quick moderation they will probably be admired there but if inflation is more sticky and continues to be in rents, wages and services they will have to be more aggressive. That is as long as there is nothing tectonic from a geopolitical point of view or in the markets. Regarding Israel, the Bank of Israel interest rate is 2.75. The research division is giving a forecast of 3.5 percent from the middle of the third quarter of 21. I think this is a reasonable environment and I don’t think the trend there will be linear but rather accelerated. We constantly check ourselves and understand that this process is painful. It mainly affects the weaker sections. We have a database of credit data and we look at what people’s circumstances are in terms of mortgages and the like. The effect of the interest rate, and that global differences. Underlying part of the abundance is the wealth effect that causes recession and lower demand. Part of the housing market. In the US, the mortgages are at a fixed interest rate and have an immediate effect on the potential buyer. In Norway, almost 100 percent variable interest rates. Here we are in the mix, and in any case the rate of change had to be faster than in the US. You can see that relatively speaking we moved very quickly in relation to the level of inflation because in our country it is low and certainly in relation to the deviation from inflation. We were asked why we were not like Hungary or Poland where the interest rates and the inflation were double-digits. There is an issue here that is hard to think about, that they had an inclination to move so that there would not be a capital flight, and they were tempted to do so before the US and Europe, and therefore the interest rate hikes were not effective.
The housing market – we hear the Ministry of Finance appreciates the moderation in precision prices. You see an increase in supply but no effect on prices, what is your forecast?
The data show a glimmer of optimism in the sense that we see construction starts – 72 to go, which is a very high volume in relation to history. It is very important. Prices are a matter of supply and demand. Demand was also moderated by interest rates rising. Part of what we are seeing is a shift to the realm of tradability and this brings us back to Hain – your values that there will definitely be a moderation in this market. There is a demographic here that does not exist in other countries such as childbirth and high demand by young couples. If we see it continue we will see moderation and if not it won’t happen.
What damage, if any, do you see to another election campaign, and will the Bank of Israel’s role as a general manager not be eroded in these years?
The immediate cost of the election is several hundreds of millions. The loss of income from Shabbat is not big personally. The big cost is uncertainty, in terms of multi-year planning. There is a huge planning gap here. This is the biggest damage. We are good at running 110 hurdles and not at running ten thousand. We went through these crises well, but we are unable to close planning gaps and on the social side to introduce Och in the periphery. Everyone knows the transportation issue. Even in the cost of living there is no hocus-pocus to the need for reform changes.
In Israel, there is usually no fiscal aid, but in retrospect, those who may need it are paid. The Bank of Israel was clear at the beginning of the Corona events that we were in a completely different environment. We break the markets. The Bank of Israel knocked on the table, moved both the treasury and the government. When I tell the governors of the world that the first Corona box was closed at the Bank of Israel at 12 midnight. Also the safety net. We of course submitted to the last government a very long document of all the reforms that were discussed – transportation, human capital, digitization, and we worked together with the light, but many things you see we were there. I’m almost four years away, 5 election systems, a pandemic, inflation, these things need to be navigated in a way that you have an influence inside and where you also need checks like a check for every citizen. But we had a great impact in the fiscal field, certainly during the caravan period, and also in the budget issue there was joint work. The direction of what is important, unfortunately the metro did not reach its end.
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