stanley fischer : challenges confronting the bank of israel and the economy address by professor stanley fischer, governor of the bank of israel, at the president ’ s residence on the occasion of his appointment for a second term as governor of the bank of israel, jerusalem, 2 may 2010. * * * mr. president, mr. prime minister, madam president of the supreme court, the minister of finance, members of the government, members of the knesset, honorable ambassadors, former governors of the bank of israel, leaders of israel ’ s banking and business sectors, members of the management and staff of the bank of israel – my colleagues and friends, representatives of the media, members of our family, friends and honored guests : i would like to thank the prime minister, the minister of finance, and the government for nominating me for a second term as governor of the bank of israel, and thank the president for agreeing to the nomination, and for his warm words. i am grateful to the government and especially the prime minister for the trust they have placed in me. it continues to be an honor and a privilege for me to lead the bank of israel, and to represent our country at home and abroad. i would like to express thanks to many others who have played an essential role in the operation of the bank of israel over the past five years : to the dedicated and highly professional management and staff of the bank of israel, without whom the israeli economy would not have come through the global economic crisis as well as it has, and whose capacities and outstanding professionalism are recognized world wide ; to the many citizens of israel who have expressed their support in different and often touching ways ; to friends and family who have made living in israel a pleasure for rhoda and me ; and above all to rhoda, who has shared in the ups and downs of each day ’ s events in the bank of israel and in the country, and whose love and support have sustained me in this period, as in the previous forty years. five years and one day ago, standing in this same place, as a new immigrant, i said that the history of israel ’ s economy is fundamentally a success story. after the ceremony several friends politely told me that i didn ’ t understand the real situation. in some respects they were right. but not about the strength of our economy. between the middle of 2003 and the middle of 2008, we grew at an annual rate of over 5 percent. then we were struck by the worst

so things have calmed down somewhat. that said, i think most observers and policymakers tend to the view that while some recovery is welcome, the relative ‘ calm ’ seems a little eerie – perhaps fragile. certainly, these events have posed a few questions for policymakers, at least for the present speaker. among the questions being considered over recent weeks were the following : • does the “ turbulence ” simply reflect the same information that is embodied in the softer global growth forecasts that have been emerging over this period? in other words is it just a noisier version of a signal that is already being received? • or has the financial volatility been telling us there has been a significant shock, the effects of which are coming but which we can ’ t see ( yet ) in forecasts or other data? • alternatively, could the turbulence be a shock that leads to a worse global outcome – by leading to a tightening of credit conditions, loss of wealth and confidence, etc., and therefore crimping demand? • or is it just a bout of market nervousness that carries little lasting importance? bis central bankers ’ speeches as always, it is impossible to be sure, but it would not be unreasonable, i think, to draw the tentative conclusion that while these movements did reflect some underlying softening in the global outlook that was already emerging, the reaction was overdone. commodity prices are well down, but actually some prices had been declining for quite a while. iron ore, for example, peaked as long ago as february 2011. moreover, in many cases declining commodity prices reflect additional supply, which usually carries a different – positive – implication for global growth, as opposed to weaker demand. while global growth forecasts are being lowered, at this stage they see higher growth rates than in 2001, which was a relatively mild slowdown episode. of course that is just a forecast – but so far there are not any actual data that invalidate that view. given some recovery in markets of late, it seems too extreme to conclude that this event itself is developing into a significant financial shock with important additional macroeconomic significance beyond the softer global growth already understood to be in prospect. having said all that, i don ’ t think we should write the episode off as just another bout of nervousness. even if the volatility was not necessarily a reflection of fundamentals, it ’ s worth ensuring that we have extracted all the information we can from it. in addition, some quite big policy