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The Bank of Israel's Monetary Committee

The economy continues to expand at a pace that is consistent with its potential growth, according to a report issued by the Bank of Israel’s Monetary Committee on Monday. However, “the first estimate of third quarter National Accounts shows a halt in the recovery of exports, due to a decline in goods exports.” And so, it isn’t the success of Israeli goods abroad which fuel a still expanding economy, as “private consumption returned to being the main component of growth.”

The fact is, no other currency in the world has strengthened against the US dollar over the past five years, except the shekel, which has gained 12% against the USD since 2012. The shekel did not make a single huge leap at any point, but was among the leaders against the dollar every single year over that period.


And so, despite the monetary committee’s insistence that “all indicators from the labor market continue to point toward its strength, and to show that it hovers around full employment,” the economic results of that high rate of employment is galloping imports, with benefits to the state coming from VAT on foreign goods rather than tax revenue from exports.

The exchange rate has stabilized since the last monetary discussion, according to the committee’s report, which says that in the past 12 months, the shekel has appreciated by 5% in effective exchange rate terms.

The real effective exchange rate (REER) is the weighted average of a country’s currency relative to an index or basket of other major currencies, adjusted for the effects of inflation. The weights are determined by comparing the relative trade balance of a country’s currency against each country within the index. It’s a nice concept, but when half of your tourism, for instance, comes from the US, your hotels remain too expensive for them, because American tourists don’t pay with baskets, they pay with dollars, and those are shrinking in value over at the King David hotel.

The Bank of Israel’s Monetary Committee sets the policy for achieving the Bank’s objectives, including monetary policy, and it decides the operations required to achieve those objectives. Established by law in 2010, the committee has six members: the Governor (Dr. Karnit Flug), who serves as chairperson of the Committee; the Deputy Governor (Dr. Nadine Baudot-Trajtenberg); an additional Bank employee (Andrew Abir​) who was appointed by the Governor; and three representatives of the public – currently Prof. Reuben Gronau, Prof. Moshe Hazan, and Prof. Zvi Hercowitz​.

The committee also reported that “housing market data continue to indicate some slowing of activity, with home prices continuing to increase at a relatively moderate rate. The volume of transactions continues to decline, apparently due to uncertainty regarding the effect that government programs in the housing area will have.”

All of which should go under the title: “Genius Finance Minister Kills Housing Market.” The decline of the housing market, which, according to Israeli media is threatening the continued operations of more than 200 major contractors across the country, can be attributed to a bizarre war that’s being launched by Finance Minister Moshe Kahlon (Kulanu) against purchases of “investment apartments.” Arguing that wealthy investors, at home and abroad, are diverting the industry towards luxury apartments in which they invest their money in a low inflation market, Minister Kahlon decided to penalize the purchasers of a third apartment (and more) with borderline irrational taxation.

This fleece-the-rich policy, Kahlon argued, would divert the industry in the direction of building for young couples, who have been unable to own their first home due to competition from luxury housing investors.

Like most social-engineering schemes, Kahlon’s plan ran against a wall of unintended consequences. The Supreme Court killed it for its vague language, but a fixed-up version is making its way back to the Knesset. Meanwhile, investors have become leery of putting their hard-earned funds in a housing market run by a man who vowed (we’re not kidding) to fight the investors in housing.

And so, in addition to a halt on exports, the result of its currency policy, Israel is enduring a slowing down of its housing market.

The committee decided to keep the interest rate unchanged at 0.1%, insisting that despite the recent increase in oil prices, inflation in most major economies remains below target.


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