Referring to the target inflation rate, Governor of the Bank of Israel Prof. Stanley Fischer said, "We'll definitely miss the inflation, but that's not too terrible" at the first annual conference of the bank's Information and Statistics Department.
He added, "Our condition is still better than in the world's other industrialized countries, and my colleagues overseas know that."
Fischer also implied that the Bank of Israel's dollar purchase plan was drawing to a close. "We must weigh the future of the dollar purchase plan."
Fischer continued, "In January 2010, we'll still be under the inflation target for the preceding 12 months. The 12-month inflation rate will plummet from 5% as of October 2008 to minus 0.4% in October 2009. Inflation this year will again undershoot the target, that is too low.
"We're outside the inflation target for most months of the year, but we're within the range when averaged out. For me, what's important are the inflation expectations, that is our test of success, and the important aspect of the inflation target policy."
Fischer said that most analysts predict long-term price stability, and he added, "That is the great achievement of our policy."
Fischer predicts that the 2009 deficit will reach 4% of GDP, assuming that the government actually implements that budget that was approved. "We're seeing a slump in tax receipts, possibly by as much as 5%, and the question is whether the new government will stay within the spending limits," he said.
Fischer added that, given the 4% of GDP budget deficit and the economic contraction, and Israel's debt-to-GDP ratio will reach 82%. "This is why it is so hard in Israel to manage an expansionary fiscal policy beyond the automatic stabilizers. Our situation is not like in the US, which can absorb a deficit of 10% of GDP."
Fischer said that the long-term interest rate was more important than the Bank of Israel interest rate. "The long-term rate has a much greater effect on bank loans. We've realized that cutting our interest rate is not trickling down to the bank interest rate, which we wanted to influence. We thought that this was worthwhile for us to begin activity in the bond market. At this stage, there was no monetary expansion, because we're sterilizing, but only at this stage. If the interest rate reaches zero, we'll stop the sterilization."
Sterilization is a process in which a central bank reduces a domestic monetary base in order to prevent the inflation threats of large capital inflows. An example is buying or selling foreign currency to adjust the relative values.
Published by Globes [online], Israel business news - www.globes-online.com - on February 19, 2009
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