The Bank of Israel will not change its interest rate policy despite the interest rate rise in the US a week ago, Governor of the Bank of Israel Karnit Flug told the Knesset Finance Committee this morning.
"Our most recent estimate is that given the relatively sluggish economic environment, despite the interest rate rise in the US last week the likelihood that we will have to continue with an expansionary monetary policy is high, and we therefore estimated that the interest rate will remain low for some time to come."
Flug did not rule out further interest rate cuts and further expansion in monetary policy, but explained that while current circumstances in the economy remain unchanged no change is to be expected in the bank's current monetary policy.
On the effect of low interest rates on home prices and mortgage taking, Flug said that the central bank was monitoring what was happening in the housing market, but added, "The interest rate tool is focused on growth and inflation, and the inflation environment has to be borne in mind. One can only guess what unemployment would be like here and what the exchange rate would be if policy were divorced from the environment. The shekel would probably have appreciated sharply and unemployment would not be as low as it is."
On poverty, Flug said, "On the basis of national income, before taxes and transfer payments, the rate of poverty in Israel is not exceptional by international comparison. That is to say, the economy in itself does not create exceptional poverty. The important point, however, is what happens to disposable income. After transfer payments and direct taxes, the rate of poverty in Israel is among the highest in the developed countries."
On the recommendations of the Strum committee on competition in Israel's banking system, Flug said, "The Strum committee recommendations are far reaching. The Bank of Israel will forcefully oppose measures that are liable to sow the seeds of the next crisis, or to harm customers.
"There are several matters on which we do not agree and that we oppose because we think that they will not serve the good of the consumer," Flug said. She mentioned that the Bank of Israel opposed the recommendation to forbid banks from issuing credit cards. "We think that this will cause disproportionate harm to consumers. It will reduce available credit. We want to increase competition by bringing in additional players, not by taking players off the field.
"Another recommendation that we consider mistaken is the one to encourage people to take consumer credit at the expense of their pension money. We think that this will harm pension security, and that is a difficult problem. Besides that, I wish to remind you that tax benefits are given in order to encourage pension saving, and this recommendation will divert pension benefits to consumption, which is very regressive."
Published by Globes [online], Israel business news - www.globes-online.com - on December 21, 2015
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