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Performance of the Israeli
Economy and Bank of Israel
Policy Challenges
Bank of Israel Annual Report 2010
March 30, 2011
1
GDP Growth Rates*
Growth outpaced the developed countries and was slower than the
developing countries.
%
12
10
8
6
4
2
0
-2
-4
-6
2000
2001
2002
2003
Developed Countries
2004
2005
2006
2007
2008
2009
Developing Countries
*Quarterly data, change from same quarter previous year. Data for Israel is seasonally adjusted.
Source: Bank of Israel and the IMF.
2010
Israel
2
Unemployment Rate*
The unemployment rate stabilized at a level much lower than the developed countries
and slightly lower than the developing countries.
%
14
12
10
8
6
4
2
2000 2001
2002 2003
Developed Countries
*Quarterly data, seasonally adjusted.
Source: Bank of Israel and the IMF.
2004 2005 2006
2007 2008
Developing Countries
2009 2010
Israel
3
Growth Rates of the Sources and Uses in 20101
Significant rise in Israel of all the uses: investment, exports and public
and private consumption.
20%
2
OECD Avg.
Israel
Developing Countries
3
16%
12%
8%
4%
0%
GDP
Imports
Exports
Public
Consumption
Private
Consumption
Fixed Capital
Investment
1) Real percent change. 2) International data was weighted using GDP size in PPP terms. 3) Developing
countries include: Brazil, India, Indonesia, Russia and South Africa.
Source: OECD, IMF and Bank of Israel data.
4
Growth Factor Decomposition: 2000-2010
In 2010, total factor productivity contributed about half of the total growth.
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Labor Input
Source: Bank of Israel and CBS
Capital Stock
Total Factor Productivity
5
Stock Indices1
The TA 100 continued its quick rise this year, similarly to the developing
markets.
Index (2004=100)
310
260
210
160
110
60
2004
2005
2006
Developed Markets
1) Monthly.
Source: MSCI Barra and the Bank of Israel.
2007
2008
2009
Developing Markets
2010
TA 100
6
Bank of Israel Policy

Bank of Israel's Policy Objectives:

Price stability as its prime objective

Support for the government's economic
targets - growth, employment, and
narrowing of social gaps

Support for the stability and orderly
functioning of the financial system
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
Current Policy Challenges:

Economy's fast pace of growth and its
approach to full employment.

Accelerated rate of inflation (actual and
expected)

Quick rise in house prices and in the cost of
housing credit

Low interest rate levels at the FED and
ECB
8
Rate of Inflation1 and Inflation Expectations2
%
6
5
Actual Inflation
4
3
2
1
0
-1
Inflation Expectations
-2
-3
2004
2005
2006
2007
2008
2009
1) Over the last 12 months. 2) 12 month rate, derived from the capital market.
Source: Bank of Israel
2010
2011
9
Real House Price Index1
Sharp rise in house prices over the last few years, though the level
does not significantly diverge from the long run trend.
120
Real House Price Index
110
Trend
100
90
80
70
60
50
40
1973
1976
1979
1982
1985
1988
1) Compared to the consumer price index, Jan. 2000 = 100.
Source: House Price Survey and Bank of Israel calculations
1991
1994
1997
2000
2003
2006
2009
10
Interest on Housing Loans and Balance of
Housing Credit
All interest rates are relatively low, non-CPI indexed rates are low
but rising; credit balance is rising quickly.
Credit to the Public for Housing1 (NIS
billions, current prices)
220
8
Nominal Interest Rate on Loans for
Housing2 (monthly, %)
7
200
6
180
5
160
4
3
140
2
120
1
100
2005
2006
2007
2008
2009
2010
0
2005
CPI-Indexed Floating
Interest
Non-CPI- Indexed
Floating Interest
CPI-Indexed Fixed
Interest
2006
2007
2008
2009
1) Includes loans given against mortgaged properties. As of Nov. 2010 these loans amounted to about NIS 20 billion. 2) The
interest rate on the CPI-indexed loans are adjusted for 12-month inflation expectations.
Source: Bank of Israel
2010
11

Policy tools available to the Bank of
Israel

Bank of Israel interest rate

Intervention in the foreign currency market

"Macropprudential" activities - tools that relate
essentially to the rate of increase, the
composition, and the terms of credit in the
economy
12
Bank of Israel Interest Rate

What factors affect the pace at which the interest rate
is increased?
 Inflation environment (actual and expected inflation)
 Rate of growth in Israel and abroad, including their
uncertainty.
 Pace of increase of the interest rate by the leading
central banks
 Developments in the shekel exchange rate
 Asset prices
13
Central Bank Interest Rates1
%
16
8
14
7
12
6
10
8.3
8
3.0
5
4
6
3
4
2
1.0
2
0
2004
0.25
1
0
2005
2006
2007
Developing Countries (left axis)
1) Monthly data.
Source: Bloomberg, IMF and the Bank of Israel
2008
2009
US
ECB
2010
2011
Israel
14
Foreign Currency Market Activities

Foreign Currency Purchases


Reporting Requirement


At the end of December 2010, foreign exchange reserves
stood at $70.9 billion, up $41.9 billion since the beginning of
the program.
Reporting obligation on foreign exchange swaps and forwards
of $10 million or more in one day (January 2011).
Reserve Requirement

Reserve requirement of 10% on foreign exchange swap
transactions with foreign residents (January 2011).
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Macroprudential Measures in the Housing
Market

August 2009 - Housing Loans with Floating Interest Rates



March 2010 - Housing Loans for Purchaser Groups





Construction phase: belongs to the construction and real estate branch
(restriction), 100% weights for capital requirements.
Construction phase: purchasing group is considered "borrower"
subjugated to a 15% restriction.
Post-construction: mortgages, no branch restriction, weighting of low risk
for capital requirements
Post-construction: every buyer is a separate borrower
July 2010 - Housing Loans with Leveraging Above 60%



Requirements for risk management
Customer disclosure requirements
Requirements for risk management
Allocation requirement of 0.75% for any loans given after July 1, 2010.
Oct. 2010 - Housing Loans with Floating Interest Rates


Weighting at 100% for capital requirement purposes: applies to loans above
NIS 800,000, LTV above 60% and if the part of the loan with a floating
interest rate is at least 25%.
Exemption for housing loans received by those entitled to housing benefits
in accordance with the criteria determined by the Ministry of Housing and
Construction.
16
Looking Forward
Research Department Forecast for 2011-2012:
Growth, Employment and the Balance of Payments1
GDP
GDP Business Sector
Private Consumption
Exports (excl. diamonds)
Fixed Capital Investment
Public Consumption
Civilian Imports (excl. diamonds)
Unemployment Rate (level)
Current Account ($ billions)
2010
4.6
5.3
4.9
10.9
12.4
3.1
9.2
6.7
6.7
2011F
4.5
5.2
3.9
4.3
7.8
2.7
9.7
6.1
3.4
1) Above data appears in units of precentage change unless otherwise noted.
2012F
4.0
4.6
3.7
5.1
5.4
2.0
4.0
5.9
3.1
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Research Department Forecast for 2011-2012:
Spread Diagrams of Inflation and Interest
Rates*
Inflation - Previous 4 Quarters
Bank of Israel Interest Rate
6.0
7.0
5.0
6.0
5.0
4.0
4.0
% 3.0
%
3.0
2.0
* The full spread includes 66% of the expected variation.
2012:4
2012:3
2012:2
2012:1
2011:4
2011:3
2011:2
2011:1
2010:4
2010:3
2010:2
2012:4
2012:3
2012:2
2012:1
2011:4
2011:3
2011:2
2011:1
2010:4
0.0
2010:3
0.0
2010:2
1.0
2010:1
1.0
2010:1
2.0
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Thank you
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