"Low interest rates will continue for a very long time. This will continue until we see either signs of growth or signs of inflation," said Governor of the Bank of Israel Prof. Stanley Fischer at the Herzliya Conference today. "Everyone is worried about how to emerge from monetary expansion. Everyone is frightened of the shock from the exit strategy. I say that there will only be a shock if we don’t expect one. So long as everyone knows that there will be an exit and withdrawal, things will be fine. All the central banks are warning that there will be a change, which will probably begin in early 2015, when we'll start to see interest rate hikes in the world."
Commenting on the shekel's appreciation, Fischer said, "Israel is a small and open economy, in which exports account for 40% of GDP and especially capital movements. Our interest rate is strongly affected by interest rates in the world. Interest rate differences between us and the Americans cause the shekel to appreciate, which is an undesirable result."
Fischer said, "The US economy is looking better because the housing market is recovering, unemployment is falling, banks are stronger, and there has been a huge change in the energy sector, with sharply rising energy production."
As for India and China, Fischer said, "China always provides underestimated forecasts, so if it is talking about 7.5% growth this year, growth could be 9% or even 10%. 8% growth in China today contributes more to the global economy than 10% growth contributed ten years ago."
Fischer said that the global economic center is returning to Asia, where it was 400 years ago. "Israel should take this into account," he added.
Turning to Israel, Fischer said, "I say that the Israeli economy is very sound, and its performance in the past few years was most impressive. It went through several military operations, the departure of the man who in many ways changed and saved the economy (Netanyahu), the sudden departure of Ariel Sharon, and of course, the global crisis. It did this because of strong foundations: a sound and conservative banking system, which continues to extend loans carefully. We are sometimes accused of caring more for the banks than for consumers; I say, 'We care for the banks' stability because we care for consumers.' Every Israeli over 50 knows what a bank crisis is, and no one wants to go there. That is why we will continue to ensure bank stability."
Fischer continued, "The Israeli economy is marked by low unemployment, on-target inflation, a positive balance of payments, stable banks, declining poverty, and a steady increase in participation in the labor force because more of the population is going out to work. This does not mean that there are no problems in the haredi (ultra-orthodox) and Arab communities, even though they are also beginning to go out to work."
Fischer reiterated that Israel's weak point is the budget. "What is not good? What is happening with the budget. If the government sticks to the spending and deficit targets, if it does that, it will still expand the budget. Let me explain: everyone thinks that there will be cuts and the budget will shrink. The government must return to 5% budget growth, because commitments indicate 10% growth. This will be very hard, politically, but this is not austerity. There is still fiscal expansion and budget growth. The risk is that this will not be politically possible is very great, and the price will be very heavy. If we don’t do what is necessary, the price will be high. Israel did this before in 2003. The situation is difficult, but it's not terrible."
As for long-term problems, Fischer said, "There is a problem of poverty, we have a demographic problem because of haredi population growth, where not everyone works and which is unsustainable. There is, of course, the security issue. In the long term, this country must make peace with its neighbors. It is important to remember that we must be prepared for the unexpected. We know how to do this well as far as security is concerned. What does this mean economically? Not to waste money on inessentials and not to fall into large deficits and high debt. How? By avoiding populism, i.e. bettering the short term at the expense of a better future."
Published by Globes [online], Israel business news - www.globes-online.com - on March 13, 2013
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