"Following the new Bank of Israel Law, today we are working in a much better decision making framework at the bank, both for interest rate decisions and for administrative decisions, which are no less important, because we have the Supervisory Council headed by Dan Propper," Governor of the Bank of Israel Stanley Fischer said at a Finance Committee session today discussing the central bank's budget for 2013. "I see how important it that someone keeps a check on us from outside and I see the effect it has on us."
During the session, Fischer commented for the first time on the surprise decision yesterday to cut the central bank's interest rate by 0.25%: "We are seeing a slowdown, though not great, in economic growth, industrial output, and in exports, which are not growing rapidly. We don't see ourselves getting into a recession, but in order to encourage demand, we lowered the interest rate. We want to give a push to growth, and that is what we did."
Athough Fischer ruled out the word "recession", he warned, "For nearly a decade we have been among the leaders for growth in the Western world, and we must continue that way. But at present we are close to full employment, and we have a deficit around 4% of GDP that's very high. If we do go into recession, the deficit will rise to 6-7% of GDP, and then the government will have financing difficulties. Then it will be much harder to take the necessary steps on the budget, and so it will be preferable to take them straight after the elections."
On the fiscal deficit that the next government will have to deal with, the governor said, "According to the spending ceiling, we will be about NIS 15 billion above the ceiling permitted to the government. It's hard to cut an amount like that, and it may be necessary to raise taxes. There's a big problem here and it won't be easy. It was very important that they decided on a tax hike beforehand, because otherwise they would not be able to raise them this year. The action taken in 2003 was very tough, but on the basis of it we were able to grow rapidly until the great crisis, and to get through the great crisis in better shape."
On the raising of the Bank of Israel's growth forecast, Fischer explained, "The change in our growth forecast for the coming year has two bases. One is what happens to the economy without gas. Here, we see a slight decline in growth, from 3% to 2.8%. This is a continuation of a gradual fall in the rate of growth, and we don't know when this will end. The second basis is the inclusion of gas production in GDP. The result is that this boosts growth to 3.8% next year. You have to understand that this 1% GDP rise is based on a small number of people that operate the drilling platforms. It's not a matter of very many workers. This won't affect employment in the short term in the way that 1% of GDP generally affects employment. It's not like regular growth."
Fischer expressed pessimism about the world economy, saying, "It's clear that the Europeans have convinced us that they will do everything to ensure that the euro doesn't break up, but meanwhile the European economy has entered a recession. Not a huge recession, but a recession. In addition, we are waiting to see what happens with the US and the fiscal cliff. Meanwhile, the global economy is problematic, the volume of world trade has fallen, and that is not good for the Israeli economy."
The governor also commented on fears that the low interest rate might heat up the housing market even more, and said, "As long as we build at a rate of 40,000 housing units a year, the situation is reasonable. In the third quarter of 2012, we fell to a pace of only 8,000 units, and at an annual rate that works out at just 32,000 housing units, and that's low. We need to work on the supply side. It isn’t that the government hasn't tried. There were reforms and attempts, but it hasn't yet succeeded and we need to persist with it."
Renovation, new banknotes
Renovation of the main building to the tune of NIS 177 million and the printing of a series of new banknotes costing NIS 150 million enlarged the budget of the Bank of Israel for 2013, as presented to the Knesset Finance Committee today, to over NIS 1 billion.
The Bank of Israel claims that excluding the renovation plan and the banknote printing, two one-time items that have not actually been budgeted but are recorded as "permissions to commit", the budget was actually cut by 5%, and amounts to NIS 731 million, compared with NIS 740 million for 2012. In 2010, the central bank's budget was only NIS 612 million (NIS 128 million less).
The bank also says that the renovation work will take at least four years, and that in 2013 the tenders will only begin, so that the actual work will start only in 2014. For the first time, the Bank of Israel budget presented to the public does not include the salaries to retirees item.
Published by Globes [online], Israel business news - www.globes-online.com - on December 25, 2012
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