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I would like to thank all those who have come here today, and the management and staff of the Bank of Israel who are with me here today, who have served the Bank with dedication and professionalism throughout my time here. It is impossible to succeed as governor without the help of the Bank’s employees and management. The Bank of Israel has excellent management, and the fact that we barely experienced any recession during the recent financial crisis is the result of, among other things, the quality of the management and analysis that the Bank of Israel provided throughout that time.

The Bank had a number of significant achievements over the past eight years. The first is the Bank of Israel Law, which enabled us, for instance, to expand the types of assets we could hold with our foreign exchange reserves. The Law built a framework for making policy decisions at the Bank—the Monetary Committee—and for making administrative decisions—the Supervisory Council. All those who are present at Monetary Committee discussions say that the quality of the monetary discussions has improved tremendously since the Committee was formed: there are many more questions, and a tremendous amount of important issues are raised for discussion. Unfortunately, I continue to read in the newspapers about “Fischer’s interest rate decision”—but that is not the case. We need to remember that the decisions are made by the Committee, of which the Governor is obviously a member. In this context, the incoming governor will encounter a situation that is different from the one he knew during his previous term here, since he will have less freedom in making policy decisions. The Supervisory Council is also comprised of professionals with first-rate experience, and I feel that I am leaving the Bank in good, professional hands. I am the last person that will say that the Governor’s job is not an important job, but it is less important today than it was before the Bank of Israel Law was implemented and the Committee and Council were established.

It took us three years to achieve a wage agreement between the Histadrut, the employees, the Ministry of Finance and management. The new agreement is not perfect. We agreed to a reduction in salaries for second generation staff, a reduction that was too large. In order for the Bank of Israel to be able to continue recruiting high quality workers, we will need to deal with this problem, and it will be one of the main challenges facing the new Governor.

We made an organizational change at the Bank, and dealt with the modernization of the computer infrastructure. This is something that is not apparent to someone looking in from the outside, but it is obviously very important. We approved a comprehensive plan to renovate the Bank’s headquarters, which is important for the future functioning of the Bank since the systems in the building are thirty years old or more. The Supervisory Council approved the renovation, and I hope that it will take place soon.

The other important achievements we have made are in the realm of macroeconomics, and they are not just achievements by the Bank of Israel, but also of others—mainly the Ministry of Finance. I frequently say that the economy has two doctors—the Bank of Israel and the Ministry of Finance—and that cooperation between the two is vital. Comparing the macroeconomic data from 2005 to the current data, we see many achievements: a decline in the debt to GDP ratio, while it increased in most advanced economies, although the government’s budget deficit is currently one of the major challenges for policy; we had a current account surplus for most of the period; there was an impressive increase in the rate of employment and a decline in the unemployment rate; and the shekel strengthened, which is a result of, inter alia, the strength of the economy. There are people who want a strong economy with a weak shekel, but these are two things that generally don’t go together. Our foreign exchange reserves increased significantly, and I am very happy about that—those reserves are an essential safety margin for the Israeli economy, and we must take care of such margins in every area that we can. We expect growth of 3.8 percent in 2013, and inflation expectations are in the middle of the target range. Israel’s economy from a macro perspective is a shining example for other economies.

During my tenure, we used a variety of policy tools. In the area of monetary policy, beyond the interest rate, we also used foreign exchange purchases and government bond purchases. We took macroprudential measures in the mortgage market and in the foreign exchange market. It was vital for us to use a forward-looking policy all the time, or as we refer to it, remaining ahead of the curve. It was clear to us at all times that the data, based on which we make our decisions at any given moment, are data that present what the economic situation was a few months ago, not to mention the uncertainty that always exists regarding the future. We used an active policy, always looking forward and asking ourselves what we must do to deal with what we believe will happen in another few months, or even in a year. This policy sometimes leads to mistakes, but these can be corrected after the fact. I believe, and I think that the members of the Monetary Committee believe, that it is preferable to try to do something than to avoid taking action and wait to see what will happen.

We were near the inflation target most of the time, and within the target range on average, but inflation was too volatile, and was outside the target range some of the time. I think that one of the important achievements of policy is that long-term inflation expectations have been within the target range almost all the time since 2004. This means that the public believes that the Bank of Israel will succeed in maintaining price stability as defined by the target range set by the government. When the public believes that the value of money will be maintained, it feels more at ease using it in long-term contracts. For instance, a few years ago, almost all contracts in the housing market were in foreign currency. Today they are in shekels. This is an important development. We succeeded in maintaining high growth rates and low unemployment, and particularly in reducing the harm to exports through foreign exchange purchases and their effect on the exchange rate. We also succeeded in maintaining financial stability.

The increase in housing prices has led to a situation where contractors are building rapidly—about 40,000 units per year, compared to less than 30,000 prior to 2007. It has also led to the fact that more units are available to the public. At the same time, we have a problem in the housing market: It is clear that the interest rate affects demand for housing. People have asked: If so, why don’t we raise the interest rate to lower prices?  The answer is simple:  The value added of exports is about 28–30 percent of GDP, and the value added of the construction industry is about 8 percent. You don’t use the interest rate to deal with housing prices at the expense of exports. Had we done that, we would have caused appreciation of the shekel, lower growth, and higher unemployment. That is a result that cannot be acceptable. The way to lower prices is to increase supply: to market more land, to reduce the time between the decision to build homes and the date when the apartment is ready for occupancy, which is currently 13 years. It’s unbelievable, but that’s the situation.

The main achievement of the Banking Supervision Department was maintaining the stability of the banking system during the crisis. Later, the Banking Supervision Department strengthened the stability of the system and capital adequacy, adopted the Basel II and Basel III Frameworks, strengthened corporate governance and risk management at the banks, and more. It also promoted competitiveness, transparency and fairness between the banks and their customers. The Supervisor of Banks headed a team that made important recommendations in this field, some of which are already being implemented. The reforms in banking fees significantly reduced current account fees, which are currently about NIS 14, on average. Today, the Banking Supervision Department announced that it will require banks to provide customers with a choice between the accounts that are generally used today and a fixed price basket of services. As such, there are always efforts being made in this area, but it will not come at the expense of stability in the banking system.

Future challenges include entrenching cooperation between regulators regarding financial stability, whether through consolidating regulation or at least establishing a committee to coordinate the regulators. Every other economy has a committee to coordinate these regulators, and it is vital that we establish such a body in Israel. We don’t feel the importance of this during routine times, but mainly during crises.

There are important challenges that face the Israeli economy, which I have often listed.

In response to questions:

I have known Jacob Frenkel for decades. He was a very successful governor, and contributed a lot to the development of the markets. The fact that we were able to operate the way we did during the crisis is a result of the reforms that he advanced. I understand that Jacob has returned the money that the State Comptroller demanded he return and that the issue has been dealt with. There is a committee that will need to look into the matter, a committee that I very much respect, and I suggest that we wait for what it will decide. I believe that in a few months, Jacob will stand here before you at a press conference as governor.

Despite the fact that Jacob was abroad, he never stopped being an Israeli for even one day. There were excellent Israeli candidates, and Karnit Flug could also have been an excellent governor, but I am sure that Jacob will do the job successfully.

Regarding the policy that Jacob Frenkel will decide to adopt, and the conjecture that he will adopt a more aggressive policy, you would need to ask him. To me, it is clear that the world in which we have operated in recent years is completely different from the one that Jacob Frenkel operated in as governor. I mention the words of Keynes, who said that when the facts change, you change your mind. Jacob will enjoy the support of an excellent Monetary Committee and management, and I believe that he will make the right decisions.

If I have to think about what I failed at, I noted the fact that we did not succeed in achieving a suitable wage agreement for second generation staff, and the fact that we did not succeed in entrenching cooperation in financial regulation. We enjoyed excellent cooperation with the Ministry of Finance and other bodies, but it is important to entrench this cooperation as I noted earlier.