”The interest rate tool is used mainly to encourage growth and prevent inflation, so we may have to continue with the economic policy of expansion and stay in the area of a low interest rate,” Bank of Israel Governor Dr. Karnit Flug told the Knesset Finance Committee on Monday during her periodical briefing.
”The housing crisis concerns us, but our main job is to maintain financial stability. We can only imagine what would have happened to the unemployment and inflation rates had the interest rate been detached from what is going on in the world,” she said, while adding that a negative interest rate ”is also a possibility.”
Addressing the Poverty Report, Flug said poverty rates in Israel are not exceptional, ”although we rank high in inequality among developed countries.” The Bank of Israel`s budget for 2016 will be NIS 1.1 billion.
Finance Committee chairman MK Moshe Gafni (United Torah Judaism) urged Flug to become more involved in improving the socio-economic situation in Israeli society. ”The social situation is very difficult. There is no solution yet for the housing crisis, the price of apartments remains very high, as is the level of inequality,” he said. ”In the State of Israel, you cannot purchase an apartment unless you are rich.”
Flug said Israel`s growth rate between 2000 and 2015 was a bit lower than the growth rate in developed countries and a bit higher that the growth rate in developing countries.
Addressing questions from MKs regarding the low interest rate`s negative effect on housing prices, Flug said ”the interest rate tool focuses on issues related to growth and inflation, not housing, and we can imagine what would happen to the exchange rate if the interest rate would not have corresponded with the interest rates in the world`s markets. It would have a negative effect on employment, prices and growth.” She said increasing supply was the best way to handle the housing crisis.
Turning her attention to the socio-economic issue, the Bank of Israel governor said Israel`s economy, in and of itself, ”does not create unusual poverty. But in net income, after taxes, national insurance and stipends, the poverty level here is higher relative to the rest of the world.”
”Stipends rescue people from poverty, and taxes reduce the inequality, the question is by how much. The policy of redistributing income through taxes, national insurance and stipends is moderate, so it does little to lower the poverty rate,” she explained.
Gafni concluded the meeting by saying that ”there are burning socio-economic issues which demand the intervention of the Bank of Israel. The housing situation in Israel is intolerable, as today only the rich can purchase an apartment, and the governments have yet to do anything about it.” The committee chairman said he would summon Flug for another meeting to address these issues.