OECD criticizes treasury, central bank economic policies

The Organisation for Economic Co-operation and Development criticized Israeli economic policy yesterday. The OECD said the Bank of Israel's foreign exchange interventions risk fueling inflation and hurting policy credibility.

The group said the central bank "moved early toward a less expansionary stance, but its continued foreign-exchange interventions risk bringing additional inflationary pressures and damaging policy credibility and coherence."

The OECD yesterday released a preliminary report on Israel's economic outlook. Israel is in the process of becoming a member of the economic group, which officials expect to be completed sometime in 2010.

The OECD also criticized the government's fiscal policies, saying Israel was relying on short-term measures to reach deficit and spending goals and described scheduled cuts in corporate and personal taxation for 2010 as untimely.

The OECD expects Israel to meet budget deficit targets of 6% of GDP in 2009 and 5.5% in 2010, but to exceed a 3% target in 2011.

"The temporary tax increases are due to expire at the end of 2010, contributing to uncertainties for the budget balance in 2011," the report said.

On the bright side the OECD said, "Positive growth in the second quarter of 2009, albeit slight, has marked the start of recovery. Economic activity is expected to pick up throughout the projection period."

The OECD projected Israeli GDP growth of zero this year, 2.25% in 2010 and 3.25% in 2011, with inflation at a 3.3% rate next year. The debt-to-GDP ratio looks to rise to 82% in 2010 from 78% in 2008 and then drop slightly in 2011.

As for inflation, the organization stated: "Underlying inflationary pressures are likely to remain muted, but the risks are on the upside."

But the OECD noted in its report that monetary policy is more normalized following a quarter-point rate hike in August.

"Further increases in the (central) bank's policy rate are expected with a return to more normal conditions," it said.

In a bid to help keep the shekel from strengthening too much versus the dollar and further damaging exports, the Bank of Israel began buying foreign currency in early 2008 to the tune of $100 million a day.

It scrapped the purchases in August and has since intervened in the market only on days of "unusual movements."

It bought $1.27 billion of forex in October, down from $1.65 billion in September and above $4 billion in August. Bank of Israel Governor Stanley Fischer said this week he would not stop until he was certain the market is functioning well.