Israel Central Bank Head Warns Economy Is ‘Losing Precious Time’
(Bloomberg) -- Israel won’t be able to proceed with the multiyear plans it needs to emerge from the coronavirus crisis until it gets its political house in order and passes an updated budget, Bank of Israel Governor Amir Yaron told the Maariv newspaper.
“Without a stable government that operates long term, it’s impossible to advance such plans,” Yaron said in an interview published on Friday. “We are creating continued uncertainty in the public and private sectors and aren’t advancing reforms. We’re losing precious time and it’s a shame.”
Israel hasn’t updated its spending plan since March 2018 while cycling through four inconclusive elections. The only permanent government formed in the past two years lasted just seven months.
While Israel’s economy has weathered the pandemic comparatively well, “credit ratings companies are worried by the government’s instability and the failure to pass a budget,” Yaron said. “We are in their sights and they are scrutinizing us all the time.”
Yaron also addressed the following issues:
The budget deficit will be high in 2021, and “very high” if action isn’t taken to rein it in by 2025, Yaron said. Among other things, “a certain tax hike is required,” he said, without going into specifics.
Government payments to furloughed workers are due to expire at the end of June, and Yaron expects hundreds of thousands of Israelis will be unemployed then. “It’s unfortunate that we didn’t take advantage of professional training programs, we have to get that process moving in high gear,” he said. Businesses that hire workers will require additional relief, and government credit funds will have to continue operating.
Earlier this year, the central bank announced it would buy $30 billion in foreign currency in 2021 to weaken the shekel. Yaron wouldn’t say whether he was satisfied with the current exchange rate, which was 3.2861 to the dollar at 10:54 a.m. in Tel Aviv. “The program we announced in the first quarter of the year is supporting the dollar, and it will continue,” he said. When Israel emerges from the coronavirus crisis, “we will reevaluate the policy.”
Inflation is rising, but Yaron doesn’t see a danger of a jump in prices. “The low long-term interest rate policy will continue as long as there isn’t an unexpected inflationary surge,” he said. “The interest rate environment will be comfortable to allow the economy to return to growth and low unemployment, while entrenching inflation within the target range” of 1% to 3%.
Yaron faulted Israel’s lenders for not passing on to consumers recent steps the Bank of Israel took to ease mortgage prices. “We aren’t happy with the behavior of the banks,” which “exploited” the lifting of the limit on the prime rate component in home loans, he said. “We expect a further reduction for mortgage takers. I can disclose, without getting into details, that we are working on additional steps to increase competition in the mortgage sector.”
The central bank blocked lenders from issuing dividends, waiting to see the effect of the country’s vaccine drive. “It’s better for the banks to wait and expand their cushions in order to give credit,” Yaron said.
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