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Fischer: Foreign Currency Intervention Succeeded

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Saturday, September 11th, 2010

As reported in Globes: Stanley Fischer told “Globes” that if speculators think that he is maintaining the exchange rate at NIS 3.80/$, then they are wrong.

On the eve of Rosh Hashana 5771, Governor of the Bank of Israel Prof. Stanley Fischer spoke with “Globes”.

“Globes”: There is a lot of criticism about your foreign currency purchasing policy, which you are still pursuing, and is beginning to become more expensive. Israel’s foreign currency reserves have already nearly reached $65 billion.

Fischer: “I don’t see anyone seriously thinking that Israel’s purchases of dollars and that its foreign currency reserves are relatively large are a problem, especially if you think about all the possible scenarios facing us. Do we have a policy? Yes. Is there a problem in what we are doing? Not now. In my opinion, the interventions succeeded, and I think that they are part of the reason why the economy emerged from the recession fairly quickly. I am sure that if the shekel-dollar exchange rate were NIS 3.20/$, the level it reached when we intensified the pace of interventions, we wouldn’t have emerged from the recession as we did.”

Do you think that speculators have realized that you are maintaining the shekel-dollar exchange rate of NIS 3.80/$, and that they are waiting to ambush you?

“If they think that, they’re wrong. The exchange rate last year was often different from NIS 3.80/$. I’ve learned not to try and set the exchange rate, and we neither set it nor draw red lines that must not be crossed. The market is strong, and we intervene if necessary and try to influence it. But to regularly set a certain level and never pass it, really not.”

Will there be a double-dip recession in the US, or only slower growth?

“US growth is slowing. Although growth is continuing, the rate is not impressive. It’s very hard to know in the middle of a recovery whether it’s unidirectional, or if there will be changes on the way up. I think that the probability of a slowdown is increasing, but I don’t think that a double-dip recession is the likeliest scenario, since a dip means a drop in GDP; in other words, a recession. Economics is still a matter of probabilities; it’s impossible to say that it won’t happen, but it’s not the expected scenario.”

How will this affect the Israeli economy?

“We’ll feel it, but the degree depends on how tough things will be outside Israel. We began to grow before the rest of the world, back in the second quarter of 2009. One of good things in the growth figures for the second quarter of 2010 was the recovery of investment in construction. If there’s a recovery in Israeli construction, we’ll be able to switch to domestic based recovery fairly easily, because we have a current accounts surplus, so we won’t have a problem from that direction.”

If there’s a slowdown in Israel and you have to use the interest rate to encourage growth, how low will you cut the interest rate? Back to 1%? You have little maneuvering room.

“That’s all theoretical, because I don’t expect to have to do it. But if we have to, there’s room, and I don’t see a problem. There are always alternatives and the possibility of raising or lowering at the margins. It’s less convenient than if we had a higher interest rate, but it’s not a problem.”

One of the criticisms of Bank of Israel’s policy is that you’ve taken on too many objectives: encouragement of growth and jobs, keeping inflation in check, maintaining the exchange rate, and dealing with the housing bubble.

“These objectives are set out in the Bank of Israel Law. I think that arguments like ‘don’t take upon yourself objectives, deal with one thing, let others do it’, when there is no on else to deal with the other objectives, is unreasonable. Obviously there are alternatives in achieving the objectives, and the economy has to decide which should have priority.

“Our general rule is clear: if the inflation rate is not within the target range, we must deal with that before anything else. The other targets come afterwards, even if they are important. Other central banks believe that there is just one objective, but we abide by the law and say, ‘We affect many things’, and we must decide on their weight.”

Is there a real estate bubble?

Obviously, if prices continue to rise at the current pace, we’ll have a bubble. Prices are rising too fast. But there’s time to deal with the problem. The best way is to deal with the supply side, which will do good things for economy on every side, but if there’s no supply, we’ll have to continue the measures we recently initiated, including use of the interest rate.

We’re seeing demand for more women in senior positions. Since independence, there has only been one woman supervisor of banks, Galia Maor, back in the mid-1980s. Is there a chance that you’ll appoint a woman as supervisor?

“Anyone who meets the strict criteria demanded by the Bank of Israel for the job as the next supervisor of banks is invited to submit their candidacy by September 15. I hope that there will be women among the candidates so that we can choose from a large pool of candidates who meet the necessary criteria for this important and critical job.”

There is another major unresolved banking issue: real competition in the retail sector. Is there any likelihood that a large US bank will come in and launch competition in the sector?

“That’s always been our hope, and so long as we build a flourishing economy here, such as it is flourishing now, the chances that this will happen will grow. But in truth, I’ve been disappointed. I’ve tried; every year until two years ago, I traveled to New York to persuade Americans to come. Later I tried to persuade others to come, but they’re only interested in private banking.”

Is there a chance of reform in the retail banking sector?

“If someone sees that they can make a lot of money, then yes. The question is where the big profits lie. Not in mortgages, because the margins are low. As for fees, we’ve already dealt with the margins; the huge differential between the interest rate that they give me and the interest rate that they take from me.

“The margins are profitable, but we’re not talking about extraordinary margins. A foreign bank that will come here to enter the retail market must first tell itself, ‘I have a way to operate efficiently and profitably.’ The big banks won’t come to be just another bank with the same technology as the Israeli banks. Our problem – “problem” in quotation marks – is that our banks are technologically sophisticated, so streamlining won’t generate big profits.”

But our banks are very fat in manpower. Such streamlining…

“Perhaps…” (With a smile, perhaps cynical, at the edges of lips.)

Why stay for a second term?

“Because I have a job to do; because it’s a real privilege to do this job. I’ve been given the opportunity to do it, and I’ve done it with pleasure. I’ve fought pretty hard so that Israel will change the structure of its central bank. It took years until the country accepted it; the government passed it and the Knesset voted in favor. I think that I can contribute to a good start of the implementation, on the right foot, and we also have many economic challenges.”

The list of things you’ve become involved in includes the peace process. Do you know of any other central banker in world who is involved in so many things?

“In less developed countries, the governor also sometimes acts as a kind of economic advisor to the government. As a country becomes more advanced, more developed and older, the governor’s involvement lessens. Years ago, when England was 300 years old, I wrote an article about central banks for the Bank of England. I gave the article to Prof. Michael Bruno (governor of the Bank of Israel in 1986-91, who died in 1996) for comments. He told me, ‘Write that the central bank is the place where the country’s key applied research is conducted. It is relied upon as an advisor because only it has the ability to employ a large research department compared with others in the economy, and with no other interests.’ As an economy grows and becomes more developed, more independent and bigger research institutes are founded.”

Israel is young, less influenced by research institutes, so your business includes many other fields?

“I usually try to make a differentiation. There are subjects that I emphasize and professional opinion, such as education. But if you were to ask, ‘Where would you, Fischer, choose to put or distribute the government and state’s resources?’ I would not answer. This is a matter of values, and in this field, I am a citizen like any other. I have to extra expertise, it’s a matter of priorities, political priorities.”