Interest rates could fall to zero by year-end

"What we are seeing is not pretty, but I know that we can deal with this crisis," says Bank of Israel Governor Stanley Fischer.

Stanley Fischer nice 88 248 (photo credit: Ariel Jerozolimski)
Stanley Fischer nice 88 248
(photo credit: Ariel Jerozolimski)
• By SHARON WROBEL Although the economic reality does not look pretty, Israel can cope with the global crisis by continuing to implement an aggressive monetary policy that might lead to a zero-interest rate by the end of the year, Bank of Israel Governor Stanley Fischer said Tuesday. "I want to send the message that we are looking reality in the eyes, and what we are seeing is not pretty," he said at a press conference in Jerusalem. "But I know that we can deal with this crisis. Over the past two months our growth forecasts have changed dramatically, in light of a 30 percent decline in the volume of exports in the past quarter and the global downturn of the economy." On Tuesday, the central bank cut interest rates by 0.75 percentage points to a historic low of 1%. Fischer hinted at the possibility that a zero-interest rate was an option, adding that under such a scenario the central bank would have a number of monetary measures at its disposal. "If interest rates fall to zero, we will use other tools if necessary, such as quantity-easing or credit-easing, as they are called in the US, to inject liquidity into the market," he said. The Bank of Israel this week lowered its growth forecast for 2009 from 1.5% to negative growth of minus 0.2%. It expects the economy to fall into a recession in the first half of the year, stabilize and resume growth in the second half. In 2010, the economy is forecasted to grow at a rate of 2.7% as exports recover. "In the last quarter of 2008, the US economy recorded negative growth of 0.5% in annual terms, while in Israel we were still in a better position with about 0% during the same quarter," Fischer said. "However, the question of when we can expect a recovery will be dependent on the success of [US President] Barak Obama's policies and how we, the Bank of Israel and the Finance Ministry, will act. If the US economy returns to positive growth by the middle of the year, we will see some growth by midyear. If not, the situation will deteriorate and a recovery will come only in 2010." There was no danger to the public's savings, since the Finance Ministry had announced a safety net, he said. Commenting on the frustration of businesses and the general public that recent interest-rate cuts were not passed on to the public, Fischer said it was creating a problem, but added that recent figures suggest that interest rates have come down from December. "On average, the credit-spreads narrow, and the problem is at the margins," he said. "Banks must manage risk. It is a problem, and we intend to publish figures in the near future." Fischer reiterated that the country's banks were not in danger of collapse, but that they will be faced with a difficult situation as economic growth falters. "At this moment in time, we can see from the banks' balance sheets and notices to the Banking Supervision Department that the banks are in relatively good shape," he said. "But there is no doubt that they are facing difficult times. As GDP growth slows to zero or to minus 0.2%, there will be loans that people will not be able to repay, which will negatively affect the banks' income. The Banking Supervision Department's demand of a 12% capital-adequacy ratio has been seen as exaggerated. It is not. It is essential." Fischer warned that any additional tax cuts intended to boost the economy - referring to the economic plan of Likud chairman Binyamin Netanyahu - would be problematic and not a realistic option in light of a looming economic recession, a big downturn in tax revenues and a growing budget deficit. Talking at a conference in Tel Aviv on Tuesday, Netanyahu presented his economic manifesto, which promises to put a brake on the acceleration of the economic crisis and reverse the trend of layoffs in the economy. "Cutting taxes is the crucial component in reversing the trend and the best engine of growth," he said. "We entered the crisis later and we will come out earlier than all the other countries because the governments here implemented various steps and reforms that improved Israel's situation. The reforms provide protection and enable the governor to cut interest rates, as he did on Monday. I praise every day that Fischer is in this position, and he is putting all forces into action, but he can not take over the role the government has to play." Under Netanyahu's economic plan, over the course of four years, income tax for individuals will gradually be lowered and company tax gradually will be reduced to 18%.