stanley fischer : israel ’ s economy and the challenges facing its banking system address by professor stanley fischer, governor of the bank of israel, at the agm of the association of banks in israel, tel aviv, 23 november 2006. * * * mr president of the association of banks in israel and chairman of bank leumi, eitan raff ; executive director, association of banks in israel, freddy wieder ; my banker colleagues and colleagues from the bank of israel ; ladies and gentlemen : may i start by thanking the association of banks in israel for inviting me and giving me the opportunity to speak before you today. i would like to relate first to the current state of israel ’ s economy, in which the banking system plays an important role, both as an active, influential participant and as an entity affected by economic developments. i will then address the challenges facing the new supervisor of banks and israel ’ s banking system. the economic situation israel ’ s economy today is doing very well, even after the war in the north. although activity slowed during the war - reflected by a negative rate of growth in the third quarter - the latest indicators point to a relatively rapid recovery of economic activity after the war. the economy has enjoyed three years of rapid growth. in the light of the national accounts data of the third quarter published recently by the central bureau of statistics, the bank of israel assesses that gdp will grow by 4. 8 percent in 2006. this is a high rate of growth by international standards, and reflects a rise in investment and in exports, a surplus in the balance of payments, a very high rate of foreign investment, increased productivity and an improvement in employment - and all this despite the war ’ s adverse impact on growth. budget data show that tax revenues have revived. the government ’ s budget deficit in 2006 is expected to be about 1. 8 percent of gdp. inflation in israel is low, and in 2006 is expected to be below the target, mainly due to the fall in oil prices and the appreciation of the shekel. in accordance with the bank of israel ’ s flexible inflation targeting approach, our intention is to bring inflation back gradually to within the target range of 1 – 3 percent a year. ten - year interest rates in israel are below 6 percent a year, and this is important to everyone who has to take a mortgage. the markets are robust and stable. three main factors account for the economy ’ s success and its ability to withstand the negative impact of the war

on the back of effective disease containment measures including vaccination programmes ; continuing adaptation of economic activity to the covid - 19 environment, accommodative monetary policy and supportive financial conditions. domestic inflation was above the objective range of 3 – 6 percent for most of 2021, with average inflation increasing from 1. 9 percent in 2020 to 6. 7 percent in 2021, largely because of the increase in levies and taxes as well as administered prices during the year and associated secondround effects. demand conditions and as, indicated by a negative output gap ( the difference between actual and potential output for the economy ), were modest and non - inflationary. indeed, the recent labour force survey results by statistics botswana, which reports an unemployment rate of 26 percent, affirms the below - trend output growth. furthermore, government expenditure increased marginally by 0. 1 percent in the first eleven months of 2021 compared to a decrease of 0. 8 percent in the prior year. within this, public sector personal emoluments rose by 4. 4 percent. the other main driver of demand, growth in commercial bank credit, increased from 4. 5 percent in 2020 to 5. 1 percent in 2021, as both demand and supply improved due to increased economic activity and prospects. lending to businesses increased by 2. 7 percent in 2021, following a 0. 5 percent decrease in 2020. for households, annual credit growth decelerated from 7. 3 percent in 2020 to 6. 4 percent in 2021, reflecting lower rates of increase in personal and motor vehicle loans. global monetary policy implementation in 2021 honourable minister, ladies and gentlemen, monetary policy implementation in 2021 was generally accommodative at the global level, characterised by maintenance of relatively low policy rates, following the aggressive reduction of interest rates in 2020 in response to the covid - 19 pandemic. however, some central banks, particularly in emerging market economies, increased their policy rates in 2021 responding to the rising inflationary pressures. moreover, some central banks in the advanced economies signalled that they would tighten policy rates, going forward, to control inflation and, in some cases, taper the asset purchase programmes introduced in 2020 to support the financial sector. closer to home, the south african reserve bank increased the repo rate by 25 basis points to 3. 75 percent in 2021 and, by another 25 basis points to 4 percent in january this year, to counter perceived upside risks to the inflation outlook. domestic monetary policy implementation in