performance of the israeli economy and bank of israel policy challenges
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1
Performance of the Israeli Performance of the Israeli Economy and Bank of Israel Economy and Bank of Israel
Policy ChallengesPolicy Challenges
Bank of Israel Annual Report 2010
March 30, 2011
2
-6
-4
-2
0
2
4
6
8
10
12
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Developed Countries Developing Countries Israel
GDP Growth Rates*Growth outpaced the developed countries and was slower than the developing countries.
%
*Quarterly data, change from same quarter previous year. Data for Israel is seasonally adjusted.
Source: Bank of Israel and the IMF.
3
Unemployment Rate*
2
4
6
8
10
12
14
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Developed Countries Developing Countries Israel
%
The unemployment rate stabilized at a level much lower than the developed countries and slightly lower than the developing countries.
*Quarterly data, seasonally adjusted. Source: Bank of Israel and the IMF.
4
Growth Rates of the Sources and Uses in 20101
0%
4%
8%
12%
16%
20%
Fixed CapitalInvestment
PrivateConsumption
PublicConsumption
ExportsImportsGDP
OECD Avg. Israel Developing Countries
Source: OECD, IMF and Bank of Israel data.
2 3
Significant rise in Israel of all the uses: investment, exports and public and private consumption.
1) Real percent change. 2) International data was weighted using GDP size in PPP terms. 3) Developing countries include: Brazil, India, Indonesia, Russia and South Africa.
5
Growth Factor Decomposition: 2000-2010
-6%-4%
-2%0%
2%4%
6%8%
10%12%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Labor Input Capital Stock Total Factor Productivity
In 2010, total factor productivity contributed about half of the total growth.
Source: Bank of Israel and CBS
6
Stock Indices1
1) Monthly.Source: MSCI Barra and the Bank of Israel.
60
110
160
210
260
310
2004 2005 2006 2007 2008 2009 2010
Developed Markets Developing Markets TA 100
Ind
ex (
2004
=10
0)
The TA 100 continued its quick rise this year, similarly to the developing markets.
7
Bank of Israel's Policy Objectives:
Price stability as its prime objective
Support for the government's economic targets - growth, employment, and narrowing of social gaps
Support for the stability and orderly functioning of the financial system
Bank of Israel Policy
8
Current Policy Challenges: Economy's fast pace of growth and its
approach to full employment. Accelerated rate of inflation (actual and
expected) Quick rise in house prices and in the cost of
housing credit Low interest rate levels at the FED and
ECB
9
%
Rate of Inflation1 and Inflation Expectations2
1) Over the last 12 months. 2) 12 month rate, derived from the capital market.
-3
-2
-1
0
1
2
3
4
5
6
2004 2005 2006 2007 2008 2009 2010 2011
Inflation Expectations
Actual Inflation
Source: Bank of Israel
10
Real House Price Index1
40
50
60
70
80
90
100
110
120
1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Real House Price Index
Trend
Sharp rise in house prices over the last few years, though the level does not significantly diverge from the long run trend.
1) Compared to the consumer price index, Jan. 2000 = 100.
Source: House Price Survey and Bank of Israel calculations
11
0
1
2
3
4
5
6
7
8
2005 2006 2007 2008 2009 2010
CPI-Indexed FloatingInterestNon-CPI- IndexedFloating InterestCPI-Indexed FixedInterest
100
120
140
160
180
200
220
2005 2006 2007 2008 2009 2010
Interest on Housing Loans and Balance of Housing Credit
Credit to the Public for Housing1 (NIS billions, current prices)
Nominal Interest Rate on Loans for Housing2 (monthly, %)
All interest rates are relatively low, non-CPI indexed rates are low but rising; credit balance is rising quickly.
1) Includes loans given against mortgaged properties. As of Nov. 2010 these loans amounted to about NIS 20 billion. 2) The interest rate on the CPI-indexed loans are adjusted for 12-month inflation expectations.Source: Bank of Israel
12
Policy tools available to the Bank of Israel
Bank of Israel interest rate
Intervention in the foreign currency market
"Macropprudential" activities - tools that relate essentially to the rate of increase, the composition, and the terms of credit in the economy
1313
Bank of Israel Interest Rate
What factors affect the pace at which the interest rate is increased? Inflation environment (actual and expected inflation) Rate of growth in Israel and abroad, including their
uncertainty. Pace of increase of the interest rate by the leading
central banks Developments in the shekel exchange rate Asset prices
14
Central Bank Interest Rates1
0
2
4
6
8
10
12
14
16
2004 2005 2006 2007 2008 2009 2010 2011
0
1
2
3
4
5
6
7
8
Developing Countries (left axis) US ECB Israel
%
1) Monthly data.Source: Bloomberg, IMF and the Bank of Israel
3.0
0.25
1.0
8.3
1515
Foreign Currency Market Activities
Foreign Currency Purchases At the end of December 2010, foreign exchange reserves
stood at $70.9 billion, up $41.9 billion since the beginning of the program.
Reporting Requirement Reporting obligation on foreign exchange swaps and forwards
of $10 million or more in one day (January 2011).
Reserve Requirement Reserve requirement of 10% on foreign exchange swap
transactions with foreign residents (January 2011).
1616
Macroprudential Measures in the Housing Market
August 2009 - Housing Loans with Floating Interest Rates Requirements for risk management Customer disclosure requirements
March 2010 - Housing Loans for Purchaser Groups Construction phase: belongs to the construction and real estate branch
(restriction), 100% weights for capital requirements. Construction phase: purchasing group is considered "borrower"
subjugated to a 15% restriction. Post-construction: mortgages, no branch restriction, weighting of low risk
for capital requirements Post-construction: every buyer is a separate borrower
July 2010 - Housing Loans with Leveraging Above 60% Requirements for risk management Allocation requirement of 0.75% for any loans given after July 1, 2010.
Oct. 2010 - Housing Loans with Floating Interest Rates Weighting at 100% for capital requirement purposes: applies to loans above
NIS 800,000, LTV above 60% and if the part of the loan with a floating interest rate is at least 25%.
Exemption for housing loans received by those entitled to housing benefits in accordance with the criteria determined by the Ministry of Housing and Construction.
17
Research Department Forecast for 2011-2012: Growth, Employment and the Balance of Payments1
1) Above data appears in units of precentage change unless otherwise noted.
Looking Forward
2010 2011F 2012F
GDP 4.6 4.5 4.0
GDP Business Sector 5.3 5.2 4.6
Private Consumption 4.9 3.9 3.7
Exports (excl. diamonds) 10.9 4.3 5.1
Fixed Capital Investment 12.4 7.8 5.4
Public Consumption 3.1 2.7 2.0
Civilian Imports (excl. diamonds) 9.2 9.7 4.0
Unemployment Rate (level) 6.7 6.1 5.9Current Account ($ billions) 6.7 3.4 3.1
18
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2010
:1
2010
:2
2010
:3
2010
:4
2011
:1
2011
:2
2011
:3
2011
:4
2012
:1
2012
:2
2012
:3
2012
:4
%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
20
10
:1
20
10
:2
20
10
:3
20
10
:4
20
11
:1
20
11
:2
20
11
:3
20
11
:4
20
12
:1
20
12
:2
20
12
:3
20
12
:4
%
Inflation - Previous 4 Quarters Bank of Israel Interest Rate
* The full spread includes 66% of the expected variation.
Research Department Forecast for 2011-2012: Spread Diagrams of Inflation and Interest
Rates*
19
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