Bank of Israel Governor Stanley Fischer said he sees signs that the Israeli economy may grow faster than the 3 percent forecast for next year.
The latest indicators are “more positive” than they were when the monetary policy committee decided to cut the interest rate at the end of October, Fischer said in an interview at his Jerusalem headquarters today.
“Two months ago there was widespread pessimism among the business sector,” he said. “There were times during the last couple of months that I was concerned we wouldn’t make 3 percent next year. Under the current set of circumstances, the balance has shifted from downside to some upside potential.”
The Bank of Israel, which joined central banks from South Korea to Brazil in reducing lending rates in October, has gradually pared the benchmark rate to 2 percent from 3.25 percent in September 2011 in an effort to shore up the economy amid the European crisis and a global slowdown. Growth will slow to 3.5 percent this year, from 4.6 percent in 2011, the Jerusalem-based Central Bureau of Statistics said in September.
The decision to cut the rate, which surprised the 24 economists surveyed by Bloomberg, made sense at the time, when growth expectations were worse, said Fischer, 69.
“Because I tend to interact more with the outside world than most people here, I was possibly a bit more aware that the global economy didn’t seem to be strengthening,” he said. “And then I was very aware that our inflation rate was right around the center of the band, so inflation wasn’t a problem.”
When “we made the decision, the expectations about future activity were very negative -- actually it is switching lately, but that was then -- so we wanted to strengthen growth somewhat, and it wasn’t a danger to inflation,” he said.
The bank’s policy makers next meet on Nov. 26. They will keep the lending rate unchanged, according to 17 economists surveyed by Bloomberg.
The decision to reduce the interest rate also helps keep the shekel from strengthening too much, Fischer said.
“The exchange rate is very, very much influenced by the geopolitical situation,” he said. “We can live with an appreciation of some sort, but we don’t want a considerable strengthening of the exchange rate.”
Ten-year interest-rate swaps, an indicator of investor expectations for rates over the period, gained 5 basis points to 3.8 percent. The shekel weakened, slipping 0.3 percent to 3.9371 a dollar.
A former No. 2 at the International Monetary Fund, Fischer said in an interview in Tokyo last month that the world is “awfully close to a recession.” While the risk has “abated some,” the economy is “still roughly the same,” he said.
“Europe looks significantly worse,” Fischer said. “There’s renewed concern about Greece, new concern about Germany, and an improvement in China.”
In the U.S., growth will probably exceed the expected 2 percent, with the rate reaching “the good old standard” of 3 percent within three or four years, Fischer said. While business results “were not great” in the third quarter, consumer finances look better than before, he said.
“Housing is coming back, there seems to be little question about that,” he said. There are weak cities and strong cities, but the average is improving, he said.
The views of Fischer, who oversees an economy smaller than Missouri’s, carry international clout because of a four-decade career spanning academia, banking and policy making.
Fischer, whose term ends in 2015, earned his undergraduate and master’s degrees at the London School of Economics. He then won a scholarship to MIT, in Cambridge, Massachusetts, where he studied under future Nobel laureate economist Paul Samuelson, whose picture hangs on a wall in his office alongside an image of Theodor Herzl, the father of modern political Zionism. Another photo features Rudiger Dornbusch, who co-authored a macroeconomic textbook with Fischer.
As an economics professor at the Massachusetts Institute of Technology, Fischer was U.S. Federal Reserve Chairman Ben S. Bernanke’s thesis adviser. His former student, who earned “A+” grades at university, should receive the same mark for his performance at the Fed, Fischer said.
“He is doing extremely well,” Fischer said. “‘The U.S. is lucky that he was in this position when the crisis began because he knew how to deal with it.’’
To contact the reporters on this story: Alisa Odenheimer in Jerusalem at firstname.lastname@example.org; Gwen Ackerman in Jerusalem at email@example.com
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