The Bank of Israel is in no hurry to raise the interest rate, as long as inflation is under control, and does not intend to announce in advance how much foreign currency it may purchase to curb the rise in the value of the shekel, Prof. Amir Yaron said in an interview with Reuters.
On Monday, the Bank of Israel left this 0.1% for the 13th consecutive meeting, due to expectations that inflation in Israel will moderate in the coming year, despite the parallel recovery process of the Israeli economy from the corona plague.
It dropped to 2.3% in October, after reaching an eight-year high in September and stood at 2.5%, although bottlenecks and difficulties in global supply lines affect Israel as much as any other country.
“We are still pursuing a very appropriate monetary policy”,
Yaron said in an interview with Reuters, adding that the Bank of Israel had “more degrees of freedom” to hold this position, thanks to the fact that inflation in Israel is expected to remain within its target range, 1% -3%.
Yaron, who described inflation as a “reverse U letter”, said that economic conditions did not indicate a continued rise in inflation over time, so “we do not see a need to rush and take monetary action in any direction”.
Analysts disagree on when the interest rate in Israel will rise, with some predicting an increase next year, while others believe there will be no change in the interest rate before 2023.
Inflation, which only turned positive in March, stabilized in part thanks to the strengthening of the shekel, which reduced the import of goods to Israel. Yaron rejected the idea that the central bank allowed the shekel to strengthen with the intention of lowering inflation.
According to him, Israel was in a different situation from countries like the Czech Republic, which have already raised interest rates, noting that:
“Their inflation is higher than the target they set quite significantly, and this is a significant difference from where Israel is.”
| Economic growth
Israel reopened its economy in March after a world-leading Corona vaccine operation, and the Bank of Israel estimated last month that at 7% in 2021, although the figure may be lower, according to Yaron, due to a weaker third quarter.
“We have not yet performed a full analysis, but growth will still reach 6% or more,”
“We see a lot of signs of a strong economy.”
Growth is expected to remain strong, he said, “as long as completely vaccine-resistant variants do not appear.”
The labor market in Israel continues to be a weakness, even though the lowest unemployment rate was 7%, and Yaron called on the government to provide more training for people who have lost their jobs due to structural changes.
Over time, Israel’s economy has shifted from manufacturing to services, led by the thriving high-tech sector.
“We are not trying to change the trend,” Yaron said of the strong shekel.
“We are trying to allow the economy to adapt to change.”
Yaron added that the Bank of Israel will continue to intervene in the markets from time to time in order to prevent large fluctuations in the shekel exchange rate, even though “there is no need to announce a specific target number.”
“We are in what I would call a return to a more considered approach,”
Said Yaron, after the Bank of Israel purchased $ 30 billion in foreign currency this year, as part of a purchase plan planned and presented in January.
The shekel has been the best-performing currency among developing economies since the outbreak of the corona plague, and has strengthened by about 10% since 2020. It reached a 26-year high against the dollar last week, at 3.04 shekels to the dollar.
This figure reflects the fluctuations in the Israeli high-tech sector, the large budget surpluses that Israel currently has, and the strengthening of the capital market, which forced pension funds and other institutions to limit their exposure to foreign exchange, but angered exporters.
According to Yaron, the shekel weakened slightly against the dollar, and the exchange rate rose from NIS 3.11 to the dollar to NIS 3.13 to the dollar.
Yaron said that the strengthening of the shekel is based on basic economic data, but added that the Bank of Israel was interested in ensuring that the adjustments would be gradual, so that companies would not make “irreversible decisions just because of too sharp fluctuations.”
The Governor of the Bank of Israel welcomed the transfer of the 2021-2022 budget in the Knesset this month, the first budget passed in Israel since 2019, and said that it includes reforms that should have been implemented long ago, without imposing fiscal restrictions. However, the government must address the high structural deficit in the budget in 2023 and 2024.
According to Yaron, a state-owned wealth fund will start operating in Israel in 2022, and it is possible that the Bank of Israel will provide recommendations on inflation targets.