Address by Governor of the Bank of Israel Professor Amir Yaron at the Appointment Ceremony
“The immediate challenge facing the Bank of Israel is the normalization of monetary policy”
“The interest rate is the main tool for directing monetary policy, and remedying specific economic vulnerabilities ought to be handled with designated tools”
“The Bank of Israel, as the economic advisor to the Government of Israel, will continue to assist and support the objectives of the government’s economic policy, in increasing growth and employment for the benefit of all the citizens of Israel”
“A modern economy cannot grow and function properly without a stable and efficient financial system. We should not take the financial stability as given, particularly in periods with numerous changes in financial markets and technologies”
“We will act to enhance competition and improve the efficiency of the capital market and the financial system, while closely safeguarding its stability, and we will work for the proper implementation of innovative financial technologies”
“To maximize the potential growth, there has to be large investment in infrastructures, an increase in efficiency and improvement in the business environment, and work to improve human capital at all levels of society through education and training that are aligned with the requirements of the labor market”
“The increase in the credit rating due to judicious fiscal policy is a significant achievement that should be maintained”
President of the State of Israel, Prime Minister, Minister of Finance, government ministers, Knesset members, past Governors of the Bank of Israel, leaders of the financial and business sectors, members of Bank of Israel management and its staff, media representatives, family, friends, and distinguished guests:
I thank Prime Minister Benjamin Netanyahu, Minister of Finance Moshe Kahlon, and all the government ministers for the trust placed in me, in choosing me to be the tenth Governor of the Bank of Israel, and I thank President Reuven Rivlin, whose signature makes this appointment official. It is a great honor for me to serve in a role that has been filled by Israel’s finest economists. I would like to particularly thank the outgoing Governor, Dr. Karnit Flug, who leaves behind a superbly managed institution, and who dedicated many hours of her private time to overlap with me, as well as Dr. Nadine Baudot-Trajtenberg, who led the Bank until I began my role.
With your permission, I would like to review the central challenges facing Israel’s economy and the Bank of Israel in the coming years, in the areas of monetary policy, financial stability, growth, and budgetary policy.
I will begin with the challenge of normalization of monetary policy
The main objective of the Bank of Israel is derived from the Bank of Israel Law—the maintaining of price stability. I intend to continue the important work done in this regard by my predecessors. The importance of quantitative inflation targets lies in their marked contribution to setting and aligning expectations of the various entities active in the economy. These targets reduce uncertainty in markets and help to achieve price stability, which enhances and improves economic efficiency. The current inflation target, within which the Bank of Israel operates, is a range of 1–3 percent per year. This target reflects an inflation rate that is low enough to support both economic activity and employment, yet is sufficiently distant from a deflationary environment.
The considerations in setting the interest rate take into account the components of the Bank of Israel’s second objective—supporting growth, employment, and the reducing of social gaps. These goals are particularly important for the resilience of all parts of society. Employment and unemployment rates have improved markedly in the past decade, the combined result of important reforms undertaken in the labor market by the government alongside the monetary policy.
I view the interest rate as the main and most effective tool for directing monetary policy. The interest rate has a broad and extensive impact on all households, companies, and financial institutions—and therefore, remedying specific economic vulnerabilities, should there be any, ought to be handled with specific and designated tools.
The immediate challenge facing the Bank of Israel is the normalization of monetary policy—a process at the end of which the Bank will be able to act, using the interest rate tool, to stabilize prices in an effective manner in accordance with economic developments, and to stabilize the inflation rate at the center of the target range. In general, in my view, and as the Bank has in fact acted recently, the exchange rate should be determined by market forces, without the need for significant intervention in the foreign exchange market. However, the Bank will continue to act in the foreign exchange market should there be anomalous fluctuations in the exchange rate that are not in line with the underlying economic conditions in the economy.
The process of normalization should be carried out in a measured and moderate manner, during which the Bank of Israel should communicate its operations clearly and transparently. It is important that the interest rate is not raised too rapidly or aggressively, as that may halt growth, but also not with a delay which is liable to cause a non-optimal allocation of resources, and an outbreak of inflation. Identifying the optimal path, the “golden path” for achieving normalization, is especially challenging because of the low interest rate environment, and in view of possible structural changes in the Israeli and global economies, which may be causing different inflation dynamics than we have known in the past. The Bank of Israel and the Monetary Committee will stand guard to maintain this proper balance.
In this regard, it is important to emphasize the absolute independence of the Bank of Israel and the Monetary Committee in setting monetary policy and determining the interest rate, as well as the Bank’s autonomy in supervising the banking system. This independence, anchored in law, is a requisite condition for the Bank’s optimal functioning, and for the outlining and implementing of monetary policy that is derived from professional considerations. These will ensure that the business environment in Israel and worldwide continue to view the Bank of Israel as a professional, independent, and reliable authority—something that in and of itself will assist in achieving economic stability and sustainable growth.
The second challenge is maintaining financial stability, capital market efficiency, and the integration of innovative financial technologies
Since the global economic crisis of 2008, the importance of financial stability has been clear to all. A modern economy cannot grow and function properly without a stable and efficient financial system. The banking system in Israel and the Israeli economy displayed resilience to economic and financial-market shocks during the crisis, and that is a notable achievement of the Bank of Israel in general, and of the Banking Supervision Department in particular. However, we should not take the financial stability as given, and it is essential to minimize the system’s exposure to systemic risks. Beyond the astute management of crises, we should focus in advance on the steps that will prevent their outbreak in the first place. The Bank of Israel, through all of its professional staff, and in coordination and collaboration with the Ministry of Finance, the Capital Market Authority, the Israel Securities Authority, and other authorities, will lead in ensuring financial stability, with a broad view of all the risks.
The financial system in Israel is stable and advanced—but we can, and should, continue to improve its functioning. We will examine, together with the other regulatory authorities, the adoption and integration of financial instruments that were tried successfully in other advanced economies. This process will lead to improved utilization of capital in the banking system and the financial entities outside the system, and will contribute to reducing the cost and broadening the menu of financial services to consumers and businesses.
The financial markets are going through marked structural changes, against the background of the accelerated developments in technology. It appears that quite a bit of the knowledge that has accumulated about the economy and money could change in the coming years. We have to be aware that the changes are causing the unknown to expand—to paraphrase the well-known saying by Confucius, “Real knowledge is to know the extent of one’s ignorance”. It is important that we remember the complacency in the financial markets worldwide prior to the outbreak of the 2008 crisis, so that we internalize the importance of identifying risks that lie beyond the current knowledge.
These developments and innovations do incorporate certain risks, but are also likely to lead to financial technologies that are more efficient both for consumers and for the various supervisory entities—that is, financial stability does not necessarily stand in contradiction to the enhancement of competition and increased efficiency. The Bank of Israel will act to improve the efficiency of the capital market and of the financial system while closely maintaining its stability, and will act to properly integrate innovative financial technologies.
“Uncertainty”, said Voltaire, “is an uncomfortable state—but certainty is an absurd one”. This saying is especially valid with regard to innovations in the field of financial instruments. Uncertainty is a fact with which we have to deal and act accordingly. There is even, as my studies of the issue indicate, “positive” uncertainty, particularly during periods of groundbreaking technological changes. The modern economy is built of interwoven fabrics of advanced technologies and financial systems, which create complex exposures to the global economy. As such, managing the risks of modern financial systems is now particularly challenging, and therefore central banks adopted new supervisory methods and tools for managing systemic risks. In this regard, the establishment of the Financial Stability Committee in Israel is a significant milestone to ensuring financial stability. Its judicious design, being led by the Bank of Israel, with coordination among all the regulatory entities, will allow the examination of regulatory arbitrage gaps, and will serve as a basis for implementing modern tools for identifying and monitoring financial sector risks.
An extremely important challenge is the challenge of economic growth, productivity, and budgetary policy
Price stability and financial stability provide the requisite infrastructure for sustainable economic growth, which is an important foundation in the resilience of the economy and all levels of society. A high rate of growth over prolonged periods of time allows for reduction in social gaps, and a marked improvement in the welfare of the general public. As is emphasized in my research, and is found to be manifested in financial markets, the changes that are significant and important to the economy and to the rise in the standard of living of its residents are the ones derived from the multi-year growth path, in contrast to purely transitory changes in growth rates.
Therefore, the Bank of Israel, as the economic advisor to the Government of Israel, and in coordination with the other relevant functions in the Ministry of Finance and in the government, will continue to assist and support the objectives of the government’s economic policy, in increasing growth and employment for the benefit of all the citizens of Israel. To maximize the potential growth inherent in the Israeli economy, there has to be large investment in infrastructures, an increase in efficiency and improvement in the business environment, incentivizing private capital investment. Likewise, we have to work to improve human capital at all levels of society through education and training that are aligned with the requirements of the labor market. As someone coming from research and teaching, this issue is particularly close to my heart. An improvement in human capital will not only increase economic efficiency, but can also contribute to battling poverty, and improve social mobility. These important factors will make it possible to markedly increase output per worker, which is the key to accelerated growth of the economy. These targets are particularly challenging, among other things, because by their very nature they are long term processes that are constantly competing for sources and resources with needs and constraints that are considered immediate. Focusing on these long term and important targets is what will make it possible to make the pie bigger, so that all of Israel’s citizens will be able to benefit from it.
The economic growth of recent years was realized with the support of prudent fiscal policy, which led to meeting the deficit targets, and as a result led to the decline of the debt to GDP ratio to around 60 percent. This is certainly a significant achievement—one that paved the way for raising the state's credit rating and that contributed directly to reducing the cost of capital for the government and for the overall economy. The attainment of these goals, and recognition of that by external entities, required considerable and consistent efforts over time, but in an asymmetrical manner, economic deterioration and a declining credit rating for a country can occur rapidly, like sliding down a slippery slope.
By their very nature, we cannot precisely forecast the timing and nature of crises. The Israeli economy and financial system are resilient and stable, but the markets’ volatility and declines in recent months, the possible end of the current business cycle, and the negative developments in world trade emphasize the importance of responsible fiscal conduct. Therefore, particularly in periods in which there are increasing demands for various expenditures, it is important to implement an adequate multiperiod budget path that will maintain, and even improve, the debt to GDP ratio. The importance is not necessarily about any specific figure, but adherence over time to a reliable budget path that reflects responsible fiscal conduct.
It is the government that decides on the division of the pie, in accordance with its priorities. However, it is possible, and even warranted, to examine the economic and social significance of the budget priorities, and how they are financed. The Bank of Israel will assist the government to do so, and will serve as a professional and independent advisor. The monetary and budgetary decisions, by their nature, impact one on the other. This fact requires a joint effort by the Bank and other functions of the government and the economy in order to maintain strong and sustainable growth in the economy. Efficient coordination among regulators and government entities—not only during crises, but precisely during normal times—will help in cultivating a strong and stable economy.
The events of the decade since the global crisis have taught us that in certain cases, there may be a need to rethink and to be open to new ideas relating to the formulation of monetary policy, to real economic growth, and to management of the financial systems. In order to examine and implement desired changes, it is important that the relationship between the Bank of Israel and the government will be open and honest, and based on mutual respect and appreciation, derived from a sense of mission and joint commitment to the public. My conversations with the Prime Minister and with the Minister of Finance imbued me with optimism regarding such future collaboration.
In conclusion, I would like to thank my parents, Hadara and Yaakov, my wife Nurit, my children Bar and Tomer, and my sisters Ayala and Hagar, for their support and help throughout the years, and especially these days. I am excited and prepared for the large challenge of managing and leading the Bank of Israel together with the Bank’s management and staff, as a partner with the Prime Minister, the Minister of Finance, and all the government ministers, to advance Israel’s economy and society.
Thank you very much.