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1 Performance of the Israeli Economy and Bank of Israel Policy Challenges Bank of Israel Annual Report 2010 March 30, 2011.

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Presentation on theme: "1 Performance of the Israeli Economy and Bank of Israel Policy Challenges Bank of Israel Annual Report 2010 March 30, 2011."— Presentation transcript:

1 1 Performance of the Israeli Economy and Bank of Israel Policy Challenges Bank of Israel Annual Report 2010 March 30, 2011

2 2 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 3 Unemployment Rate* % 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 4 Growth Rates of the Sources and Uses in 2010 1 Source: OECD, IMF and Bank of Israel data. 23 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 5 Growth Factor Decomposition: 2000-2010 In 2010, total factor productivity contributed about half of the total growth. Source: Bank of Israel and CBS

6 6 Stock Indices 1 1) Monthly. Source: MSCI Barra and the Bank of Israel. Index (2004=100) The TA 100 continued its quick rise this year, similarly to the developing markets.

7 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 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 9 % Rate of Inflation 1 and Inflation Expectations 2 1) Over the last 12 months. 2) 12 month rate, derived from the capital market. Source: Bank of Israel

10 10 Real House Price Index 1 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 11 Interest on Housing Loans and Balance of Housing Credit Credit to the Public for Housing 1 (NIS billions, current prices) Nominal Interest Rate on Loans for Housing 2 (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 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

13 13 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 14 Central Bank Interest Rates 1 % 1)Monthly data. Source: Bloomberg, IMF and the Bank of Israel 3.0 0.25 1.0 8.3

15 15 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).

16 16 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 17 Research Department Forecast for 2011-2012: Growth, Employment and the Balance of Payments 1 1) Above data appears in units of precentage change unless otherwise noted. Looking Forward

18 18 Inflation - Previous 4 QuartersBank 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 19 Thank you

20 20 Change in GDP and Employment in the OECD 1 1) Between Q2/2009 - Q3/2010 Source: OECD and CBS data and Bank of Israel calculations. Sharp increase in employment in Israel even when accounting for GDP growth rate.

21 21 Private Consumption and the Tel Aviv 100 Index 1 Private consumption excl. durables continued to rise steadily; private consumption of durables is correlated with a measure of financial assets. 1) Quarterly data. Source: CBS and the Tel Aviv Stock Exchange

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