Yaron Amir: Setting goals and embracing innovation to meet the
challenges of a changing environment
Remarks by Mr Yaron Amir, Governor of the Bank of Israel, at the opening of the Globes
newspaper's "Governors' Conference", Tel Aviv, 1 September 2019.
* * *
Good evening.
I am very happy to have the opportunity to sit here today with three of my predecessors and to
discuss core central banking issues-I cannot think of a more appropriate group with whom to
hold such a discussion. There is no need for me to introduce the previous governors, but
nonetheless, it is important not to take for granted their achievements, which placed the
Bank of Israel at the forefront of economic activity in Israel and in central banking worldwide, and
strengthened the Israeli economy, its stability and its robustness. They led us to the situation in
which we can today take the steps necessary to prepare the economy for the challenges of the
future.
Prof. Jacob Frenkel was the stabilizing Governor, who drove forward the foreign
When he took office, there were those who thought that after
exchange market liberalization.
we had succeeded in eliminating the hyperinflation of the 1980s, a further decline from the level
of 20 percent to a lower level was not worth the cost involved. Jacob led an extended, persistent
and committed process, at the end of which Israel reached low inflation, and the economy
benefited from stability and certainty for many years in that area. As you know, today we are
dealing with inflation that is slightly lower than the target (perhaps it would have been better to
work just a drop less, Jacob). Today it is clear to all that this effort was worth it in the long run.
Jacob conducted the liberalization process in the foreign exchange market and in the balance of
payments, and thanks to him, the overall economy benefits from full openness of the foreign
exchange market and from the free flow of funds between the domestic economy and abroad.
Prof. Stanley Fischer is the Governor who successfully withstood the global crisis. Under
his leadership, and while the global economy trembled, the Bank of Israel was an island of
stability, judgment, original thinking, and brave actions, which instilled confidence in market
participants, companies, and the general public, and was one of the factors in Israel's economy
being among those that suffered less from the global crisis. Stan determinedly led the legislation
of the new Bank of Israel Law, in the framework of which, in contrast to human nature, he led the
process of cutting the powers of the Governor, who until that change was almost all-powerful.
Due to him, monetary policy decisions today are reached by a committee, which enhances the
public legitimacy and the independence of the Bank of Israel in reaching decisions. The Bank
also operates, from an administrative perspective, under the watchful eye and guidance of the
Supervisory Council. These and other changes did not make the lives of the Governors who
succeeded him easier (and I'm not complaining, Stanley-not yet), but they improved and
strengthened the functioning of the Bank of Israel.
Prof. Karnit Flug was the Governor who grabbed the bull by the horns and dealt with the
fundamental problems of the Israeli economy. Karnit put on the table, clearly, the problem of the
Israeli economy's low productivity-maybe the factor that will have the most impact on the
welfare of Israel's citizens in the coming decades. Due to a series of research studies and
analyses carried out during her term in office, today everyone is able to point to the problem.
Karnit's term was characterized by a significant reform in the financial system. Under her
leadership, the Bank took on itself the establishment of the Credit Data System, which we
launched five months ago; the Bank collaborated with the Ministry of Finance and other entities in
designing, legislating, and carrying out the reform to enhance the competition in banking. With
the clear recognition of the importance of financial stability, Karnit insisted on promoting the
legislation of the Financial Stability Committee, which is an important infrastructure in reducing
risks if and when a crisis occurs.
So immense thanks to you, my predecessors, and of course thank you as well to Globes for the
distinguished platform you have gathered here. I will take this opportunity to tell my predecessors,
and the public, about what has been going on at the Bank of Israel since I took office, and about
our plans for the future.
The economic world as we knew it is undergoing great changes. In order to continue to
function in a changing environment, and to know how to optimally advance in the face of
potential crises, we have to speak, think, and breathe technological, financial, and
research-related innovation.
In the first months of my term, we completed several processes that had begun in previous
years. As I noted, we went live with the Credit Data System, which is operating satisfactorily. A
large number of financial entities, including those not obligated by law, joined the system and
began reporting to it and receiving data from it. We also set out the separation of two credit card
companies, while ensuring that the parameters of the separation support the goals of the reform.
I am also happy to update that the Financial Stability Committee has already met several times
and is making progress with the formulation of its tools and work procedures. We presented to
the government an extensive and clear analysis on the need to carry out fiscal adjustments. In
parallel, we presented a plan to improve the standard of living and productivity in the economy-
with an emphasis on operative policy proposals.
We are not blind to the housing issue, and its impact on the young generation. Therefore, I asked
the Research Department to begin formulating operative recommendations in the housing area,
in order to help the new government identify the order of priorities and to act to remove obstacles
that weigh on increasing the supply of homes.
In a joint initiative with the IMF, we are developing a new macroeconomic model, which takes into
account two sectors that to date have not been included in the common models-the housing
market and the financial system. Recall that these two were among the main factors in the 2008
crisis. The model will serve us in macro assessments but will also contribute to the work of the
Financial Stability Committee. In another joint initiative with the IMF, we are working on an
international conference on cyber risk in the financial and banking system, with the understanding
that looking forward, this is one of the main risks to financial stability.
Given the changes in the global economy, and with eyes to the future, I initiated
a strategic
process to define the Bank's goals for the coming years. The entire management has been
enlisted in this process, which is being conducted by the Director General of the Bank, Hezi Kalo.
It is not straightforward to carry out such a process in the midst of the ongoing work that is
always very intensive, but it was clear to me that we must look beyond the immediate issues.
Therefore, we added a slogan to the process-"Working today, thinking about tomorrow". I asked
the members of management to think outside the box, and to try to identify the important
challenges that the Bank of Israel and the Israeli economy will deal with in the coming years. To
that end, we set up several teams, with the participation of tens of staff and managers, in all the
relevant areas:
The first deals with monetary policy in the modern era, and asks the big questions. In view
of the changes in the global and domestic economies, and in view of the changes that are
likely to occur in the structure of money in the modern age, it is crucial to understand how
monetary policy should be conducted and what is the toolbox required to do so. Thus,
already in the coming year we intend to carry out a process of rethinking the monetary policy
framework, and we have already invited senior officials from central banks around the world
to come to Israel and participate in a conference we plan to hold on the issue. It is certainly
possible that at the end of the process we will reach the conclusion that the current regime
is the correct one and there is no need to change it, but we must challenge that thinking from
all sides before reaching that conclusion.
Another team is dealing with the financial system of the future, and how to prepare for the
changes expected in it. The team is formulating a strategy, the goal of which is to maintain
financial stability while aligning the financial and regulatory system to the changing
environment, enhancing competition, and implementing innovation. The technological
developments that are changing the financial system were at the core of the team's work, as
were the challenges deriving from the growth in the number of type of participants in the
system, alongside questions raised regarding the role of the Bank of Israel as a main factor
in the financial system and in the capital market overall.
The third team is having a ball. It is focused on advanced technologies in the digital era.
The team thought about the effects of the digital era on financial infrastructures-open
banking, blockchain, digital currencies, and the need to update the payment systems in the
economy to an immediate and fast payment system-an area in which Israel lags behind
the global frontier. They discussed the contribution of the fintech industry to the Israeli
economy, how innovation can be promoted in the financial system and in the economy
overall, as well as how to change the Bank itself into a digital and innovative organization.
Anyone who knows me knows that I The fourth team
live and breathe research and data.
that we established deals with that. I'm afraid that since I took office I have caused more than
a few white hairs among the excellent people in the Bank's Research Department and the
Information and Statistics Department, with the requirements and requests I set for them.
The statistical data are among the main building blocks in a central bank's work. Looking
ahead, there will be a need to collect new data of various types from new sources. Big data,
visual data, audio-visual, geographic data, artificial intelligence-these are all areas that are
being developed at a rapid pace and the Bank will have to examine how to derive the
maximum from them in order to fulfill its various functions, and how to make the data
accessible to the public in the most efficient and convenient manner.
We are also looking inward-to the human
resource-the most important asset a central
bank has. We are comprehensively examining our operational setup, what strategy will
ensure the adequate inputs for carrying out the Bank's functions over time; and our
communication with the public-whether, and how, to adjust how we explain ourselves to
the public in view of the sharp changes occurring in the world in communication in general,
and in how central banks communicate with the public in particular.
This process is complex and comprehensive. Our goal is to question every convention, and
to leave no stone unturned. And obviously, our test will be in the implementation. In view of how
the entire bank was enlisted into this process, I am sure that ultimately the Bank will be better
prepared to fulfill its objectives optimally, in view of our upcoming challenges over the coming
years.
And from these lofty ideas, let's move for a moment to some current issues.
As you know, last week the Monetary Committee decided to keep the interest rate unchanged,
though it conveyed a different message than the one we conveyed in recent months. The
message was changed because the data changed-in central banking jargon that is called data
dependency. Within a relatively short period of time, we saw a decline in inflation, a change in the
direction of monetary policy worldwide, a worsening of the risks to the global economy, and a
relatively sharp appreciation of the shekel. We noted with satisfaction that the domestic economy
is in a good situation-and indeed, when looking beyond the technical volatility, we see that the
economy is growing at a solid pace, the labor market remains tight, and it appears that to date
the slowdown in the global economy is not trickling down to the Israeli economy, not even to
exports, which continue to grow, particularly due to services exports.
If the economy is in a good state, why did we note that if necessary we will take steps to make
monetary policy more accommodative? First, because the trend of inflation changed. It is not
clear to us at this point if it is noise in the data-loud noise, to be sure, but noise-or a
fundamental decline in inflation. However, it is clear to us that we have to continue to strive and
raise the inflation rate toward the midpoint of the target range. Second, the risks have intensified.
Should the risks be realized, we will want to act in a timely manner, in order to prevent to the
extent possible a slowdown in economic activity. How will we do that? We have a range of tools,
and they are all on the table. There are the standard tools, and we are refreshing the toolbox
regarding tools that have not been tried here, or have not been used for a very long time.
And one more comment on monetary tools-in recent weeks the issue of the foreign exchange
market has been in the headlines. Therefore, maybe this is the time to clarify-I did declare that
in principle I would prefer that the exchange rate would be set by market equilibrium, and that
was the also the Bank's approach before I took office. Practically, there is a window of exchange
rates that we view as consistent with price stability and economic activity, when we take into
account all the factors and variables in the economy. The window is dynamic, and depends on
parameters that change all the time, which naturally should not be disclosed.
From this perspective, the Bank of Israel policy on this issue could be called "constructive
ambiguity", which is the appropriate policy for a small economy such as Israel; and therefore, if
and when the Bank of Israel will assess that the exchange rate has materially deviated from the
window that we defined, we may very well intervene in the market-and no one will receive a
warning letter from us beforehand.
Thank you!