Highlights: "Decision makers must restore stability and certainty to the Israeli economy," says Bank of Israel Governor Amir Yaron. Yaron also referred to the budget approved by the Knesset: "Looking at the budget mix, I believe that it lacks essential growth generators for the economy" The inflation level is high, at 5 percent, according to the Governor. "About 50%-80% of high-tech companies founded in March of this year chose to incorporate through a foreign company," he said.
"In recent months, following the proposed changes regarding the judicial system and the events that accompanied them, there has been a decline in Israel's economic certainty." Bank of Israel Governor Amir Yaron said during the Economic and Social Conference • Among his remarks, he also referred to the budget approved by the Knesset: "Looking at the budget mix, I believe that it lacks essential growth generators for the economy."
During the 30th Eli Horowitz Conference on Economics and Society of the Israel Democracy Institute, which took place on Tuesday, Bank of Israel Governor Eli Horowitz spoke, "Decision makers must restore stability and certainty to the Israeli economy. As I have said before: as long as constitutional changes are made, they must maintain the strength and independence of institutions, with the dialogue of all stakeholders and broad agreement."
"There is no doubt that the Israeli economy has experienced a significant domestic shock in recent months. This is not surprising: an economy loves certainty and stability. In recent months, following the proposed changes regarding the legal system and the events that accompanied them, there has been a decline in Israel's economic certainty as perceived by the markets. As soon as certainty in the economy is undermined, then the certainty of doing business is also undermined. This does not mean that one day the world will stop trading with Israel; This also does not mean that we will not see significant investments in the Israeli economy – and it is important for me to welcome any such investment, such as Nvidia's choice to establish the supercomputer in Israel. But it does mean that the continued uncertainty has considerable economic costs," added Governor Yaron.
Bank of Israel Governor Prof. Amir Yaron, Photo: Oren Ben Hakon
Yaron went on to signal that due to the sharp depreciation of the shekel in recent weeks, there may be additional interest rate increases. "In its most recent interest rate decision, the Monetary Committee noted that the interest rate is in a restraining environment, one that is appropriate for moderating inflation during the coming year. This is so long as there are no material changes in activity and in the inflation environment. Since then, we have experienced another depreciation of about two to three percent. To the extent that this trend continues, even more restraining monetary policy may be required," Yaron said.
Regarding the level of inflation, Prof. Amir said, "The inflation level is high, at 5 percent. The most recent CPI surprised the capital market, forecasters, and us to the upside, increasing by 0.8 percent, while expectations were for 0.4–0.5 percent. The bottom line is that inflation is sticky. Many talk about the effectiveness of monetary policy in different countries. Here it is important for me to clarify two important points: First, as with dieting: losing the last five kilograms is sometimes the hardest."
On the subject of the banking industry and the lively public debate on the issue of banks, the Governor said: "There is no doubt that the recent increase in the inflation environment and the interest rate have led to high profitability of the banking system. This phenomenon is not surprising: the connection between an increase in the interest rate and an increase in spreads is well known and documented in the economic literature. In Israel, this is also compounded by the indexation component of credit balances to inflation."
"About 50%-80% of high-tech companies founded in March of this year chose to incorporate through a foreign company. To the extent that this trend persists, it may have a negative impact on the economy in the long term."
"I expect the banking system to pass on the interest rate increase to the public not only through the increase in the cost of credit but also through the increase in the interest rate on deposits," the governor said. According to the Governor, "As of today, the public's shekel deposits in the banking system stand at NIS 1.4 trillion, of which more than NIS 500 billion are in current accounts. These balances do not usually generate interest for depositors, but generate interest income for the bank. On this issue as well, I say clearly to the banks: You must act fairly, with long-term strategic thinking, and enlighten customers to the fact that they can put their money in interest-bearing deposits, and give them the opportunity to enjoy the benefits that accompany the high interest rate environment."
Summing up the issue, he said: "To the extent that the banking system does not do this on its own, we at the Bank of Israel will not hesitate to act using the regulatory tools at our disposal, and to ensure that the banks will be obligated to contact customers proactively and offer them more attractive savings tracks than current accounts."
The Governor also referred to the state budget approved by the Knesset last week and criticized its mix: "Looking at the budget mix, I believe that it lacks essential growth generators for the economy, and in some places there is even a negative contribution to this." Regarding the challenge of integrating the ultra-Orthodox population into the labor market, the Governor said: "Unfortunately, it seems that on the issue of human capital and preparedness for the labor market, there is no real news in the current budget, and there is concern that perhaps even the opposite."
Moments of voting on the state budget, photo: none
In conclusion, the Governor addressed the impact of the legal reform on the economy, saying: "The decline in Israel's capital raising volume is sharper than in the rest of the world. In addition, an estimate recently published by the Israel Innovation Authority estimates that about 50%-80% of high-tech companies founded in March of this year chose to incorporate through a foreign company. To the extent that this trend persists, it may have a negative impact on the economy in the long term. Since the beginning of the year, the domestic capital market has underperformed relative to the rest of the world, and the price of the risk premium on government bonds has risen to the end."
"Excess depreciation of about 10%"
The Governor added: "Another connection that has weakened in recent months is the link between equity indices abroad and the exchange rate. The foreign exchange market is the most liquid, and is an important indicator of sentiment relative to the Israeli economy. The forecasted exchange rate is about NIS 3.3 per dollar, while the actual exchange rate is around NIS 3.7. Simply put, this result can be referred to as "excess devaluation." That is, one that is not derived from the estimated relationship between the exchange rate and the US stock market, as it was until the end of 2022. In order to be conservative, and look at the entire recent period and not just the end data, the excess depreciation can be quantified by about 10%."
According to the Governor, the depreciation of the surplus has a significant impact on the economy. "For every percentage of depreciation, the annual index is expected to rise by about one-fifth of a percent. We have excess inflation of at least one percent."
"The Israeli economy is dynamic and resilient, as it has shown throughout the crises of recent years. At the moment, the Israeli economy indicates robust activity with some moderation in the most recent data and inflation that remains sticky," the Governor concluded.
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