Amidst the continued steep decline of the dollar, Bank of Israel Governor Prof. Stanley Fischer held a press conference Wednesday announcing the release of Bank of Israel’s 2006 Annual Report.



"Economic performance in 2006," the report stated, "exceeded levels by developed countries in some cases." The report acknowledged that most of the benefit from the economic growth took place in hi-tech.



Israel achieved 5.1% growth in 2006, much more than either the US (3.3%) or Europe (3.1%). Israeli GDP per capita rose by 3.3%, beating the 2.3% recorded in both Europe and the US. Israel’s per capita GDP of $19,900, however, remains far below the $43,000 of the US and $34,000 of Europe.



The annual report called for continued gradual lowering of taxes in Israel, which is said were similar to those in developing countries. It also recommended increasing pensions, instituting a negative income tax and reducing the number of foreign workers in Israel.



Dismissed Calls for Intervention

Fischer spoke about pressure he is facing to intervene in foreign currency trading to halt the slide of the shekel-dollar rate. “We have no intention of intervening in foreign currency trading. We reserve this instrument for times of crisis,” he said. “An intervention is easy to begin, but very hard to halt. The foreign currency market is performing well... It would change the nature of the market completely if we intervene. Instead of the market focusing on fundamentals, it will be wondering how we were feeling that morning."

The dollar continued its free-fall plummet today, dropping nearly 1% to a level of 4.066 shekels - the lowest it has been since December 2000. 

Fischer also rejected calls to adjust the Bank of Israel’s interest rates. “We have only one instrument - the interest rate - to deal with three targets,” he said. “And it’s not always possible to achieve all the targets, and trade-offs become necessary between the three targets - inflation, growth, and financial stability - when deciding the interest rate. This consideration will continue to guide us in future interest rate decisions, just as it has until now.”



According to Globes, all of the members of the Bank of Israel’s monetary policy committee unanimously decided at their last meeting to leave the rate unchanged at 4% for the month of April.



"The decision not to change the interest rate is in line with the Bank of Israel’s policy of aiming to return inflation to within the target range gradually, while maintaining financial stability,” the committee’s minutes record. “It is expected that during the next year rapid economic growth, in conjunction with the continued narrowing of the output gap, will act to bring inflation back into the target range. The marked drop in unemployment in the last quarter of 2006 strengthens the assessment that the narrowing of the output gap is proceeding faster than was thought previously."



Fischer Opposes Paying Rent in Dollars

Fischer came out against continued Israeli use of dollars for representative exchange rates, calling it a “relic of the era of hyperinflation.”

“We’re considering [abolishing the representative exchange rates], but we haven’t yet made a decision,” Fischer said at a Wednesday press conference announcing the release of Bank of Israel’s 2006 Annual Report. “There are arguments both for abolishing representative exchange rates and for keeping the present situation. Representative exchange rates are still an anchor and help many people,” he said.

Most Israelis pay rent in dollars, or the amount of shekels equivalent with the representative exchange rate on the day rent is due. Speaking with Army Radio, Fischer lamented that reality, saying that the practice was based on the assumption that the US economy was more stable than Israel's - something which is no longer the case in 2007.



Admits Shortcomings

Fischer admitted to having missed the 2006 inflation target, but explained the circumstances that caused it. “Missing the inflation target was explained mainly by two external developments which were difficult to foresee in the second half of the year: the weakening of the dollar, which caused the shekel to appreciate rapidly, and the sharp drop in oil prices. Toward the end of the year, the Bank of Israel cut the interest rate several times, and in contrast to earlier rate cuts these were relatively fast and created an unprecedented negative interest rate gap with the US rate of interest. Nevertheless, it will still require some time before inflation returns to within the target range."

Laments Necessity of Crisis for Progress

The governor, a recent oleh (immigrant to Israel) from the United States, referred to his having to intervene with regard to Bank of Israel wage issues as an “unpleasant experience.” 

“Problems aren’t solved in Israel until they reach crisis dimensions, and that’s a pity," Fischer lamented.