Bank of Israel has left interest rates at 0.25%

by Ifi Reporter Category:Banking Aug 28, 2019


The Bank of Israel announced on Wednesday that it has left interest rates at 0.25%, the interest rate for nine months, according to economists' forecasts. The decision of the Monetary Committee, chaired by the Governor of the Bank of Israel, Prof. Amir Yaron, did not surprise the market, especially in light of the Governor's statement after the Fed's decision in July that it was not expected to raise interest rates for a prolonged period.
In its interest rate decision, the committee noted, following the Governor's extraordinary announcement late last month, that "in light of the turnaround in the inflationary environment in Israel, and in the main central banks' monetary policy, the moderation in the global economy and the continued appreciation, the interest rate will not rise for a long time" One month, the committee watched a moderate rise in interest rates.
The committee also emphasized that "if necessary, the committee will take further steps to further expand monetary policy, in order to support the process of ending inflation in the target area environment and economic activity." The committee does not specify what measures the bank is considering, but it is likely that this is a further reduction in interest rates or intervention in the foreign exchange market.
The committee considered the inflation environment and that the last two indices were significantly lower than expected. However, while inflation fell by the same two indices from 1.5% to 0.5% (below the lower limit of the inflation target), inflation less energy and fruits and vegetables fell from 1.1% to 0.9%, with the main negative effect being due to the high volatility of fruits and vegetables. . Now they want to examine whether this was a temporary decline due to the same volatility or new inflation environment.
In line with expectations: The Bank of Israel interest rate remains unchanged - at 0.25%
In its latest research report released last month, bank economists estimate that "the Bank of Israel's interest rate will rise to 0.5% in the third quarter of 2019, similar to the April forecast. Two additional increases are expected in 2020, with interest rates expected to be 1.0% at the end." However, lowering the US interest rate and the surprise in the inflation environment are likely to slow the trend and possibly change it.
In a recent interest rate decision in July, Yaron said: "In recent months, developments in the global economy have been a major concern for us. We have seen weaknesses in Europe and emerging markets over the past few months, and recently signs of some slowdown in the US have also accumulated. Growth in global trade has been stalled, and the "trade war" is the main factor driving sentiment from real activity and financial markets. "
A special report from the Bank of Israel recommended the cancellation on Friday and the transition of the education system to a five-day school week. This is part of operative recommendations to increase fertility in Israel.
The authors of the report believe that the lack of synchronization between the educational system's vacations and vacations in the rest of the economy is a particularly prominent phenomenon in Israel and this impairs the work efficiency of parents of small children. The authors of the report recommend moving to a 5-day study week and at the same time canceling the vacation days that are practiced during the working days of the rest of the economy for a similar amount of hours, so that the total study days do not change.
Israel's problem of fertility has been known for years, especially after the Bank of Israel began to put it on the agenda, in light of the unflattering comparisons to the other OECD countries. GDP per working hour in Israel is 24% lower than the average in OECD countries, a gap that has not narrowed in recent decades.
Closing that gap and raising workers' productivity in Israel will allow wages and living standards to rise. While the total cost of the measures recommended by the Bank of Israel is about NIS 42 billion, the long-term benefit to it will be estimated at NIS 270 billion.
 The major investment that the government needs to make to improve productivity in Israel is in education and in the field of infrastructure. The Bank of Israel emphasizes early childhood education: While the education system today is seen primarily as a therapeutic framework that allows parents to go to work, the Bank of Israel emphasizes the need to strengthen the educational component even in the early stages, especially among households in the lower deciles.
In addition, the Bank emphasizes the importance of raising the quality of teaching staff in schools, even if at the expense of reducing the size of classrooms or adding teaching hours. To this end, the Bank of Israel makes it clear that the structure of remuneration for teachers and their working conditions must be changed, so that the salary conditions will be especially improved for new teachers, especially those with training in subjects where there is a shortage: mathematics, science and English. In particular, improvement in schools that accommodate students from poor backgrounds is required.
The Bank of Israel emphasizes that the addition of resources to the education system will only be relevant alongside improving personal and organizational assessment processes - which will, of course, anger the teachers' organizations. This is because after years of making many budgetary additions to the education system without any improvement, the Bank of Israel argues that the addition of resources that will benefit quality personnel will be of greater benefit.
The Bank also notes that improving the productivity and attractiveness of the teaching profession also requires investment in improving the physical work environment of teachers, especially in view of extending their stay in schools, as part of the reforms that have been carried out over the last decade.
In the field of education, the Bank also refers to the training of ultra-Orthodox men, which to this day has avoided political considerations, mainly. The bank notes that "promoting relevant studies for the labor market among the ultra-Orthodox men is critical, because their weight in the population is expected to grow significantly, and because it is very difficult to correct those who are later unskilled in school age." However, the last government refused to mention core studies at all, so this is a recommendation that will be difficult for politicians to accept.
According to the analysis of the Bank of Israel, the cost of investment in education should amount to 1% of GDP (over NIS 12 billion). However, the benefit from the investment will be more than six times the investment, which will of course be spread over years. While early childhood investment will only produce fruit after a few decades, investment in training and high school will produce fruit after several years.
In the field of physical infrastructure, as previously recommended, the Bank of Israel emphasizes the importance of investing in public transport infrastructure - especially Metro in Gush Dan alongside a support system for surrounding trains, along with investment in unique routes alongside congestion tax. The Bank also emphasizes the importance of investing in telecommunications infrastructure that Israel lags in compared to the OECD countries. The estimated cost of investing in infrastructure is over NIS 25 billion, but this should yield an almost four-fold increase in GDP.
The Bank's recommendations also talk about reducing the tax benefits that are given to exporting companies today through the Law on Encouraging Capital Investment. According to the Bank of Israel, "Based on economic theory, empirical findings and international experience, we conclude that providing a permanent benefit to an exporting company, even if it has a higher productivity, is in itself not justified. Others. "
At the same time, the Bank recommends that the benefits to huge companies be provided within the strategic track (which provides tax rates that also reach only 5%) in order to maintain the attractiveness of the Israeli economy in the eyes of the international companies.
Another point the Bank of Israel refers to is the improvement of regulation and business environment. The Bank recommends "setting targets in wage agreements for adopting digital processes in government services for the business sector, and adopting a digital signature process that will save the need to physically reach government offices."
The Bank also recommends "amending the legislation to enable business processes to be expanded, expanded and managed on the one hand, and to declare and monitor them in retrospect, ensuring that the mechanisms in place for these processes are budgeted at an effective level of enforcement and service." Improving regulation and bureaucracy can improve long-term growth by 2% according to the Bank of Israel calculations.



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