Current section :

Central bank governor of the year 2010: Stanley Fischer’s bold moves show the value of experience

Israel’s resilience during the financial crisis and its aftermath proves that Stanley Fischer is worthy of the respect he commands at the top of the global financial community. Dominic O’Neill reports.

Fischer honoured by Euromoney at IMF/World Bank meetings in Washington
Sunday, October 10, 2010

Central bank governor of the year, Israel's central bank governor, Stanley Fischer

Why Stanley Fischer should head the IMF
25 May 2011

Lagarde’s background “not an advantage” for IMF in Greece crisis, says Stanley Fischer
6 July 2011

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.

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 policy.

After contracting in the fourth quarter of 2008 and the first quarter of 2009, Israel’s economy recovered to a point where it grew 4.8% in the fourth quarter of 2009. In 2010 Israel’s 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 intact.

In Israel’s 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 Israel’s 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 Israel’s 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 Israel’s 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 country’s main export markets.

Bank of Israel’s 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 Israel’s report stated that the level of ownership concentration in Israel was characteristic of a developing country. Nevertheless, the central bank’s 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 MSCI.

"It’s important to fix your financial system quickly, and not wait around to deal with the problem"

Stanley Fischer

Central bank governor of the year, Israel's central bank governor, Stanley Fischer


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 Israel’s parliament passed a new Bank of Israel law, which reduces the governor’s power over monetary policy and the central bank’s 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 Fischer’s arrival, as its employees were some of Israel’s highest-paid officials.