Most analysts thought that the Bank of Israel would leave its interest rate unchanged in December at 0.75%, for the 4th consecutive month, but central bank Governor Stanley Fischer surprised with a 0.25% increase – to 1%. Following the decision, analysts' reactions varied from one end of the spectrum to the other – from a statement that the interest increase constituted a serious blow to the business sector, which has just begun to recover from the recession, to the opinion that recent signs of initial recovery justified the increase in interest, which still remains low and far below equilibrium.
In its press statement on the interest rate increase, the Bank of Israel gave three main reasons for the decision:
A concern about accelerating inflation: over the last 12 months, inflation was 2.9%, very close to the upper bound of the 1-3% annual inflation target, and the bank considers that in the months ahead, inflation could pass this upper bound (this is strange because most forecasts point to restrained inflation over the next 6 months). Thus higher interest is needed to maintain inflation within the target range.
Economic activity is beginning to revive: GDP in the 3rd quarter grew at an annualized rate of 2.2% and was the second consecutive quarter with positive growth (see the blog of 22.11.09 entitled "Everbody's growing"). This and other recent signs of revival show that interest can be increased without fear of compromising the revival. In any case, a 1% interest rate is still very low and can assist activity to continue expanding.
Signs of interest increases in other countries: though some central banks have increased interest in recent months, the US Federal Reserve and the European Central Bank still have not. However, the Bank of Israel claims that these central banks are making preparations to begin increasing their interest rates during 2010, for the same reasons that interest has already been raised in Israel.
There is no doubt that Governor Fischer received "backing" for his decision from the accelerated growth of exports in recent months, proof of an initial global revival, and from devaluation of the shekel of some 3% against the US$ over the past month: he obviously considers that the higher interest rate will not strengthen the shekel enough to alter the positive export trend.
Will the recent interest hike lead to further increases in the near future? This is unlikely, even though most analysts consider current interest to be too low. The Governor will certainly wait and see what happens with interest policy in the US and Europe: at the moment, the consensus is that the Fed will not begin to increase interest before the 2nd half of 2010.
After the recent increase, interest in Israel is now 0.75 percentage points above interest in the US. The Governor will not want this gap to widen much further.
Posted on the I-Biz blog on 22 November 2009
Nov 25, 2009
Nov 23, 2009
Everybody's growing
GDP in Israel grew by an annualized 2.2% in the 3rd quarter of 2009. As the media reacted, this is an impressive performance: the second consecutive quarterly increase after two quarters of negative growth, an accelerated increase compared to the previous quarter (where growth was revised up from 0.8% to 1%), and overall, a clear sign of Israel's recovery from the recession. But perhaps the most important economic news is that most industrialized economies showed positive growth in the 3rd quarter. As Professor Stanley Fisher, Governor of the Bank of Israel, has stated frequently, revival of the economy will only be assured when the global economy begins to revive.
Israel did not experience the fastest 3rd quarter growth: GDP in Korea, Japan, the US, Germany and Italy grew faster. Israel is also not the only industrialized country with two consecutive quarters of renewed growth to its credit: the Japanese, German and French economies also began growing again in the 2nd quarter of 2009.
What is certain is that the recession in Israel was much shorter than in practically all other industrialized countries, which experienced 4-5 consecutive quarters of negative growth compared to Israel's two (the one exception was Korea, with only one quarter of declining GDP). The two main industrialized economies still showing negative growth in the 3rd quarter of 2009 are the UK and Spain: for both, this is the 6th consecutive quarter of declining GDP.
The impressive nature of Israel's 3rd quarter growth performance is also reflected in the developments in the main GDP components which increased rapidly: private consumption – by an annualized 8.9% (following an 8.1% increase in the previous quarter, fixed capital investment – by 23.2%, and exports of goods and services – by 21.8% (following a 14.6% jump in the previous quarter).
The 2.2% increase in total GDP seems limited compared to these sharp increases in GDP components. The explanation is the parallel steep increase in imports of goods and services in the 3rd quarter – by 61.9%. This increase in imports is in itself an indicator of recovery, in an economy as dependent as Israel is on imports as an ingredient of growth.
Other indicators of activity in October (such as the Purchasing Managers' Index) show growth continuing in the early part of the 4th quarter. But there are still some major sectors where the latest data point to a long way to go to return to pre-recession levels: one example is industrial production which in September 2009 (the latest month for which data are available) was still more than 8% lower than in mid-2008.
So however impressive 3rd quarter GDP data look, the consensus is that the revival, in Israel and elsewhere, is still very much in its initial stages. It could take a long time before we can conclude that the global economy is finally "out of the woods".
Posted on the I-Biz blog on 22 November 2009
Israel did not experience the fastest 3rd quarter growth: GDP in Korea, Japan, the US, Germany and Italy grew faster. Israel is also not the only industrialized country with two consecutive quarters of renewed growth to its credit: the Japanese, German and French economies also began growing again in the 2nd quarter of 2009.
What is certain is that the recession in Israel was much shorter than in practically all other industrialized countries, which experienced 4-5 consecutive quarters of negative growth compared to Israel's two (the one exception was Korea, with only one quarter of declining GDP). The two main industrialized economies still showing negative growth in the 3rd quarter of 2009 are the UK and Spain: for both, this is the 6th consecutive quarter of declining GDP.
The impressive nature of Israel's 3rd quarter growth performance is also reflected in the developments in the main GDP components which increased rapidly: private consumption – by an annualized 8.9% (following an 8.1% increase in the previous quarter, fixed capital investment – by 23.2%, and exports of goods and services – by 21.8% (following a 14.6% jump in the previous quarter).
The 2.2% increase in total GDP seems limited compared to these sharp increases in GDP components. The explanation is the parallel steep increase in imports of goods and services in the 3rd quarter – by 61.9%. This increase in imports is in itself an indicator of recovery, in an economy as dependent as Israel is on imports as an ingredient of growth.
Other indicators of activity in October (such as the Purchasing Managers' Index) show growth continuing in the early part of the 4th quarter. But there are still some major sectors where the latest data point to a long way to go to return to pre-recession levels: one example is industrial production which in September 2009 (the latest month for which data are available) was still more than 8% lower than in mid-2008.
So however impressive 3rd quarter GDP data look, the consensus is that the revival, in Israel and elsewhere, is still very much in its initial stages. It could take a long time before we can conclude that the global economy is finally "out of the woods".
Posted on the I-Biz blog on 22 November 2009
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