Fischer honoured by Euromoney at IMF/World Bank meetings in
JUST OVER A year ago, Bank of Israel became the first leading
central bank to raise interest rates after the global financial
crisis intensified in September 2008. It was a bold move by the
central bank governor, Stanley Fischer, and it surprised some.
But it has proved well guided and prescient. Countries such as
Australia and India have been forced to follow suit.
Sunday, October 10, 2010
The quarter-point rise
succeeded in striking the right balance between moderating
inflation and continuing to support the recovery. As the
central bank pointed out at the time, the higher interest rate
of just 0.75% still constituted an expansionary monetary
After contracting in the
fourth quarter of 2008 and the first quarter of 2009,
Israels economy recovered to a point where it grew 4.8%
in the fourth quarter of 2009. In 2010 Israels growth has
continued to exceed expectations, growing 3.6% in the first
quarter and 4.7% in the second.
By March this year
Fischer had raised the benchmark interest rate to 1.5%.
Inflation fell to 1.8% in July, well within the 1% to 3% target
range. Inflation is down from 3.5% a year earlier, although
Fischer raised rates again at the end of July, to 1.75%.
With all the political
problems Israel has encountered during the global financial
crisis, the economy might have been expected to suffer more.
Yet as Fischer himself points out in an interview at the
beginning of September, economies are more responsive to
monetary stimulus when the financial system is still
In Israels case,
Hapoalim, previously the biggest bank, suffered a $235 million
net loss in 2008 because of write-downs on US mortgage-backed
securities. But the financial system was never brought to its
knees and there were no bailouts. The biggest banks replenished
capital in the markets.
Another factor supporting
a recovery has been Bank of Israels policy of intervening
in the currency market in the face of upward pressure on the
shekel, after Israel began to be seen as a safe haven. Bank of
Israels reserves more than doubled between March 2008 and
September 2009, reaching more than $60 billion, a level around
which they have hovered over the past year.
This has served a double
purpose. First, at $30 billion, the reserves were too low, as
Fischer acknowledges. Second, maintaining an exchange rate of
just below four shekels to the dollar has supported
Israels exports. Exports account for 40% to 45% of
economic activity in Israel, with high-tech a particularly
important constituent. Europe and the US are the countrys
main export markets.
Bank of Israels
move to an interventionist policy is another example of
innovative leadership by Fischer. Israel had maintained a
non-interventionist currency policy before. Fischer has given
Bank of Israel confidence to do things differently. More
examples of this can be seen in the new macro-prudential
policies he has supported.
As a case in point:
Israeli house prices have risen by more than 20% over the past
year, but in June Fischer told banks to set aside higher
reserves for housing loans with high loan-to-value ratios.
Additionally, Bank of Israel made suggestions in a report in
May for how the government could tackle the highly concentrated
nature of corporate ownership in Israel.
The report suggested a
tax on dividend transfers to deal with so-called pyramid-style
structures of hierarchical interlocking ownership. Another
suggestion was to force separation of control of financial
institutions from non-financial institutions: to mitigate the
risks in the financial sector.
Bank of Israels
report stated that the level of ownership concentration in
Israel was characteristic of a developing country.
Nevertheless, the central banks efficiency in dealing
with such economic vulnerabilities contributes to Israel
increasingly being regarded as a developed country, despite the
unremitting criticism its government faces over policies in
Gaza and the West Bank. In May this year, Israel was admitted
to the Organization for Economic Cooperation and Development,
passing a series of developmental standards. In the same month,
it was upgraded to developed-market status by index provider
For its part, Bank of Israel has developed its own governance
structure this year. Fischer accepted a second five-year term
as governor in March only after Israels parliament passed
a new Bank of Israel law, which reduces the governors
power over monetary policy and the central banks
management and budget. The law follows the resolution, to which
Fischer contributed, of a public dispute dating from the early
2000s over pay at Bank of Israel. The bank had faced criticism
before Fischers arrival, as its employees were some of
Israels highest-paid officials.
"Its important to fix your financial
system quickly, and not wait around to deal with the