Stanley Fischer May Have the Answer If Israel Rate Stops at Zero
Stanley Fischer May Have the Answer If Israel Rate Stops at Zero
(Bloomberg) --
The last time Israel started to cut interest rates under Stanley Fischer, the central bank ended up stopping just short of negative territory.
It may soon face the same dilemma. A single hike since 2011 has left the Bank of Israel with a bare minimum of policy room before bumping against zero.
Although policy makers have only said that the country’s key rate won’t rise from 0.25% for an “extended period,” the market is already pricing in a cut as the central bank’s next move. Just weeks after adopting a new bias toward easing, it’s set to extend its pause at a meeting on Monday.
Lacking a better option, policy makers could turn to negative rates as soon as the second half of next year, according to Amir Kahanovich, chief economist for Phoenix-Excellence investment house.
Annual price growth was at 0.6% in August, near the weakest in a year and below the central bank’s 1%-3% target range. Meanwhile, Israel’s currency has largely been politics-proof despite two national elections this year that ended in a deadlock. It’s the world’s fourth-best performer in 2019 against the dollar.
“Inflation in Israel is very low, not by accident, and the Bank of Israel to heat the inflation back again to its target needs to take down the interest rate,” Kahanovich said. If the central bank doesn’t implement negative rates, then “we’ll continue to see the shekel get stronger” and there will be a hit to the economic performance, he said.
For an alternative view, Israel could again turn to Fischer and look for fiscal stimulus in case of a downturn.
‘Not Enough’
Fischer, who’s also a former vice chair of the U.S. Federal Reserve, argued in a paper he co-wrote that during the next deterioration in growth, there is “not enough monetary policy space,” so fiscal policy must pick up the slack.
It’s an approach that could soon gain traction worldwide.
“There is a lot of room for using expansionary fiscal policy,” said Leo Leiderman, chief economic adviser at Bank Hapoalim and an economics professor at Tel Aviv University. “The policy rate should stay more or less where it is.”
Back in 2011, the Bank of Israel responded to a global downturn under Fischer’s leadership by starting a series of rate cuts that pushed the benchmark from 3.25% to a record low 0.1% in 2015. At the time, the central bank wasn’t ruling out a further move below zero and didn’t consider its policy tools exhausted.
The key rate stayed on hold, however, until a surprise hike last November.
The developed world’s experiment with negative rates may still prove a step too far in Israel. Foreign-exchange purchases would take precedence over rate reductions if looser monetary policy is needed to fight currency strength, according to economists at Bank Hapoalim.
While a fear of recession stalks the global economy, Israel’s prospects are far more upbeat, with the central bank’s research department forecasting growth will slow only slightly this year before rebounding next.
What’s more, with housing prices rising and concern over the high cost of living, negative rates -- which encourage spending -- could exacerbate imbalances.
Israel doesn’t “need to be in an extreme situation like that,” said Rafi Melnick, a former monetary committee member. “Our economy is after all growing.”
--With assistance from Harumi Ichikura.
To contact the reporter on this story: Ivan Levingston in New York at ilevingston@bloomberg.net
To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky, Michael Gunn
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