Growth is good, but not good enough
Governor of the Bank of Israel Stanley Fischer said it was worth paying the price of expansionary measures in the US.
Governor of the Bank of Israel Stanley Fischer spoke this evening at a conference held by the Commercial-Industrial Club in Tel Aviv. Fischer responded to questions from economists, company managers, and journalists.
Talking about the Bank of Israel's commitment to deal with problems in the real estate market, Fischer made rare use of the word "bubble": "We won't let the Israeli economy develop a real estate bubble and as a result develop problems in the fiancial market we will prevent this," he said.
On the basis of the Bank of Israel's Inflation Report, Fischer estimated that rents would rise 6-8% next year. "We ask why housing prices continue to rise? The answer is that this is a very good asset to buy with low interest rates, and that's what is happening. We have started to raise interest rates, but people want to buy houses, and there aren't more houses. The natural thing to happen is that prices rise.
"If new homes are built, we will presumably see a fall in prices, and a disappearance of this problem next year. All the noise in this market will stop. Supply is the key to this problem, and the government must take the necessary measures."
Fischer said that it was the Bank of Israel's responsibility to see to it that a bubble will not develop. "Our way is to take care of demand, and we will continue to take steps such as those we announced last week to tell the banks: 'What you are doing when you give a mortgage at a low but variable rate of interest is dangerous, and you have to set aside reserves against the possibility that people will not be able to pay the money.' If necessary, we will take additional steps in the future, but I hope we won't come to that. Supply should kick in and do the job. That's better than any other measure."
Fischer opened his remarks by commenting on recent developments in the US economy: "According to the definitions, it's more than three years since the recession started in the US, in July 2007. At the beginning, they talked about it as the sub-prime crisis. If Bernanke had not taken the very brave steps he took then, we would have seen a crisis more like that of the 1930s.
"Several countries have not emerged from the recession. The US has according to the definitions, but the truth is that the unemployment rate there is close to 10%, and no-one there feels they have come out of recession, certainly not from the period of very slow growth that began there a few months ago, and led them to announce a more expansive monetary policy under the headline QE2."
On the local economy, Fischer said, "Inflation last year was 2.4%, close to the middle of our target range, which is 1-3%." He presented figures showing a growth rate in the first quarter of this year above 4%, with the current balance of payments account in surplus. "This is a very, very good position, and besides that, we started this crisis at the end of 2007 with unemployment at its lowest level in the past fifteen years, and expected that it would rise to 9% during the crisis. It rose to only 8%, and has already returned to 6.3%, almost the lowest level since the mid 1990s, which means the economy has emerge from the crisis and we are close to full employment."
Commenting on the burning question of the exchange rate, Fischer said, "The shekel is appreciating against the dollar… all kinds of people around the world are angry at the Americans and claim that what they are doing is causing problems. It's true, it causes us problems too the shekel is strengthening. But if we have to choose between a healthy American economy with a few problems with the exchange rate, and an American economy that isn't growing and us feeling the effect here, the first option is preferable. Until the US economy returns to substantial growth, the global economy will not return to sustainable growth, and so in my opinion this is a relatively low price to pay, if this measure helps the US return to fairly rapid growth, and that is the aim of the central bank there."
Published by Globes [online], Israel business news - www.globes-online.com - on November 4, 2010
© Copyright of Globes Publisher Itonut (1983) Ltd. 2010
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