Fischer Channels Fed in Changing Bank of Israel Focus to Growth
During his two decades at MIT, Stanley Fischer helped educate both the future heads of the Federal Reserve and the European Central Bank. As Israel’s central bank chief, he’s steering toward the U.S. (TA-25) model.
Fischer’s dual focus on employment and growth alongside price stability resembles the Fed’s and has marked a shift at the Bank of Israel, where previous governors placed an ECB-style emphasis on inflation. It’s among a raft of changes that the 69- year-old, Zambian-born economist has introduced during almost eight years in charge, after earlier jobs as No. 2 at the International Monetary Fund and vice-chairman at Citigroup Inc.
Investors have struggled to adapt to the new priorities. The Fischer-led Bank of Israel has surprised economists in about a quarter of its rate decisions, more often than any other Organization for Economic Cooperation and Development country for which comparable data is tracked by Bloomberg. Three of four rate cuts last year, the most recent on Dec. 24, weren’t anticipated by the median forecast in Bloomberg surveys.
“The bottom line is, no one realized how dovish he is,” said Jonathan Katz, a Jerusalem-based economist for HSBC Holdings Plc.
The shift has helped Israel’s economy rebound from the global crisis faster than most peers. Since 2009, output has expanded by 14.7 percent, compared with 10.7 percent in Australia, 3.2 percent in the U.S. and a contraction of 1.5 percent in the Eurozone, the Finance Ministry said in a report. Israel’s main stock index has outperformed U.S. and European benchmarks in that period, adding more than 80 percent.
Still, last year’s economic growth rate of 3.3 percent was the slowest since 2009. Any acceleration in 2013 will probably come from energy finds, as companies including Delek Drilling-LP (DEDRL) and Avner Oil Exploration LLP (AVNRL) start producing natural gas from the Tamar offshore field. The Bank of Israel forecasts a 3.8 percent expansion this year and says that excluding the gas flow, the rate would drop to 2.8 percent.
“We were growing 5 percent up to 2010, and we’re not now,” Fischer said in a November interview at his Jerusalem office. “I’m not sure we can go back to 5 percent, but I don’t think we are at our maximum growth rate for this stage of our development.”
Slowing growth has eased demand and helped to keep inflation within the government target of 1 percent to 3 percent since September 2011, the longest such period since 2007, leaving room for Fischer and the monetary policy panel to lower rates. Since October 2011, under a law championed by Fischer, interest rates are set by a vote on the panel. They were previously decided by the governor alone.
Against that backdrop of slowing inflation and growth, the failure of most economists in Bloomberg surveys to predict Fischer’s last two cuts suggests that “communication is not that great at the moment,” said Rafi Gozlan, chief economist at I.B.I.-Israel Brokerage and Investments Ltd.
When Fischer cut the benchmark by a quarter-point to 2 percent in October, none of the 24 economists that Bloomberg surveyed had predicted the move. In December, less than half expected the cut. Of the six rate cuts Fischer and his panel have made since September 2011, only two were forecast by the median estimate in Bloomberg surveys.
Some of Fischer’s innovations have been aimed at making the bank more transparent, such as publishing minutes of rates meetings and holding quarterly sessions with economic forecasters.
One reason transparency has proved a hard target is Israel’s exposure, as a small and open economy, to global volatility as well as the fact that statistics are often revised substantially from quarter to quarter, “so you have to be a bit more careful with what you tell the market,” Gozlan said.
Personal history may help explain some of the differences of outlook between Fischer and predecessors. Israel’s struggle in the 1980s with inflation that peaked above 400 percent was formative for previous central bankers. Fischer spent most of that decade teaching economics at the Massachusetts Institute of Technology, and didn’t become an Israeli citizen or live there full-time until he took the bank job in 2005.
“Previous governors were influenced by that trauma,” said Ofer Klein, head of research at Harel Insurance & Financial Services Ltd. in Ramat Gan. “Fischer hadn’t had that.”
One of those predecessors, Jacob Frenkel, says Fischer is doing a “fabulous job” in circumstances very different from his own time in office, from 1991 to 2000, when “the main challenge was to reduce inflation.”
“We had significant engines of economic growth,” Frenkel, now chairman of JP Morgan Chase International, said in a phone interview from New York. He cited the “very large influx of immigrants, primarily from the former Soviet Union,” and “an extraordinary boom from the high technology revolution.”
Israeli growth averaged more than 5.5 percent in the 1990s, according to IMF data. Inflation, which exceeded 20 percent in 1991, had slowed to about 1 percent by the time Frenkel left. “Today, inflation has been arrested and the global economy is very sluggish,” the former governor said. “The main challenge is to secure sustainable economic growth.”
Some economists who didn’t expect Fischer’s recent cuts had cited Israel’s rising house prices as an argument against lower rates. Alex Zabezhinsky at DS Securities & Investments Ltd. said in an October report that reducing the benchmark “is liable to raise the risk that lies in the ballooning real-estate market,” as well as eroding incentives to invest in bank deposits or bonds.
Home prices increased 3.7 percent in the 12 months through October, and they are up about 20 percent since 2010 and 50 percent in the past decade, according to the Central Bureau of Statistics. Housing debt rose 7.5 percent to 275 billion shekels ($73.5 billion) at the end of October. The Bank of Israel capped the loan-to-value ratio in new housing credits in an effort to keep mortgages in check.
Overall inflation poses less of a threat, slowing to 1.4 percent in November. The expected rate in 12 months’ time dropped to 1.8 percent in December, the lowest since 2009, according to a Bank of Israel report. Inflation expectations derived from bond prices were at 2.2 percent, the bank said.
Inflation at those levels supports the argument that Fischer has achieved the price stability that is the bank’s “central goal” after its mandate was changed in a 2010 law backed by Fisher, who made its passage a condition for serving a second term. The law also took away his right to set interest rates alone, making it a committee decision.
“We didn’t have that clear of a mandate in the previous law,” Fischer said in the November interview. Asked how he would feel if he found himself in the minority over rates, Fischer referred to his Bank of England counterpart.
“Mervyn King wanted to be outvoted, and he has been, because he wanted the precedent to be set,” Fischer said. “My guess is that as long as it doesn’t happen too often, it would be OK. But I haven’t had to cross that bridge yet.”
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