(Bloomberg) -- Israel's economic transformation has turned it into an "emerging markets safe haven" that continued to absorb money from abroad despite maintaining near-zero interest rates, according to central bank Governor Amir Yaron.
The inflows in recent years were a reflection of "the structural change in the fundamentals of the Israeli economy," including the county's declining debt burden and current-account surpluses, Yaron said in a speech at the annual retreat for central bankers from around the world in Jackson Hole, Wyoming,
"In spite of having kept rates very low, Israel faced capital inflows following the U.S. rate hikes," Yaron said in prepared remarks. "And appreciation pressures emerged -- a marked change from past patterns."
Israel has struggled to normalize its monetary policy after years of near-zero borrowing costs. As a strong currency dampened inflation this year and major central banks turned more dovish, Yaron put off a future hike and said in late July that rates won't rise for a "long time."
Yaron cited research to demonstrate how "Israel is caught in between" policies in major economies. Unlike the period before the global financial crisis a decade ago, short maturities on Israeli government bond yields are now more correlated with Europe's while longer tenors more closely track the U.S.
"A challenge for the policy makers in markets like Israel is to deal with divergence of policies in the major blocs," Yaron said.
Another issue he raised in Jackson Hole was Israel's weak inflation, which he said had been higher than among its peers before slowing.
"Such developments make real-time assessments of whether policy makers are faced with transitory divergence or structural economic changes a challenge," Yaron said. "While there is a wish to not be behind the curve, the uncertainty and ambiguity suggest a call for greater patience and risk aversion."
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