"We are most worried about the weakness of global demand," Governor of the Bank of Israel Karnit Flug told CNN's Richard Quest in an interview two days ago. Flug explained that Israel's growth engine was mainly based on exports, and so a slowdown in global demand hurts the Israeli economy.
Flug, who was attending the 2016 annual meetings of the World Bank and the International Monetary Fund in Washington DC, said that low growth in investment was one of the main factors causing slow demand and weak growth in trade. "That certainly affects countries like Israel," she said.
Asked about monetary policy and whether the Bank of Israel might introduce a negative interest rate, Flug responded that "if it isn't necessary, don't go there." She said near-zero interest rates had been enough to support the Israeli economy and that although the inflation rate was still negative, there was no need to go as far as negative interest rates, which she said had undesirable side effects.
On the phenomenon of widening inequality, Flug told Quest that this was matter that greatly concerned Israeli policy makers, and that the challenge was to devise policy that would provide incentives to work and at the same time contribute to narrowing inequality.
Flug, who held a series of meetings with world economic leaders, said in summing up the gathering, "From the meetings we have held there emerges a very challenging picture as far as the global economy is concerned for the coming years. The International Monetary Fund described the risks to the global economy, and it stresses the fear that the voice of those forces calling for restricting global trade will grow louder. These risks sharpen the need for policy measures that solve the long-term problems that the various economies are coping with. Other central banks are dealing with challenges similar to those facing the Bank of Israel. Their representatives expressed great interest in the way the Bank of Israel conducts policy, and shared with us knowledge and experience from their own countries."
A delegation from Israel's Ministry of Finance, which also took part in the conference, met the director general of the International and EU Department in the British Treasury, Mark Bowman. The sides discussed the steps that the British government is taking to implement Brexit, the exit of the UK from the European Union, and to dispel the uncertainty surrounding that decision. The delegations also discussed matters of shared concern, such as high housing prices, the financial systems, and boosting productivity.
Minister of Finance director-general Shai Babad said, "From the meetings we held we formed the view that global growth figures will not improve in the near future. As in Israel, in the developed countries the productivity problem represents a significant block to higher growth. We learned from our meetings with our counterparts in China, India, Australia and the UK how they are dealing with the challenges, and the steps they are taking to increase growth. At these meetings, the options were raised for expanding collaboration with foreign investors in cyber-security and high-tech, following legislative changes in Israel designed to encourage high-tech companies to operate from Israel. Another matter discussed was deepening cooperation on infrastructure and transport, with an emphasis on PPP projects."
Published by Globes [online], Israel business news - www.globes-online.com - on October 9, 2016
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