​Summary:

  • The Consumer Price Index (CPI) increased by 2.7 percent in 2010, reaching the upper section of the inflation target band (1 -3 percent). At the beginning of the year the annual inflation rate exceeded the upper limit of the band, and since June it has remained within the target range.
  • A major factor pushing the inflation rate above the mid-point of the target range was the housing component, which primarily reflects rents. This rose by 4.9 percent in 2010, while the CPI without housing rose by 1.9 percent. The CPI excluding housing and fruit and vegetables increased by 1.3 percent in 2010.
  • A major factor moderating price increases in 2010 was local currency appreciation, which derived inter alia from the interest rate differential between Israel and other countries. There was effective local currency appreciation of 7 percent in 2010.
  • There was a rise in the inflation environment during the year, due in part to world commodity price increases as well as to Israel’s economic growth , which was supported by expansionary monetary policy, and which acted to narrow the economy's excess capacity.
  • Monetary policy in 2010 faced challenges associated with the recovery from the economic crisis alongside the relatively slow recovery of the leading developed countries. The fact that inflation was expected to lie in the region of the upper limit of the target range, together with the rapid increase in house prices alongside the expansion of housing credit, supported a rise in the interest rate from its previous low level. The persistence of the slack economic situation of the US and Europe, their remarkably low interest rates, and the trend of local currency appreciation in Israel served to moderate the rise in the domestic interest rate.
  • In view of the challenges confronting it, the Bank of Israel acted to attain its objectives by employing a number of tools: In addition to adjusting the interest rate—the principal instrument of monetary policy—the Bank continued to intervene in the foreign-exchange market, and implemented macro-prudential measures in the housing credit market.
  • The Bank of Israel raised the interest rate from 1 percent at the end of 2009 to 2 percent in December 2010—continuing the gradual upward trend which began in September 2009.
  • In view of the pressures for excess appreciation, deriving from large short-term inflows of capital against the backdrop of the expansion of interest rate differentials between Israel and the developed economies, the Bank of Israel continued to buy foreign currency in the market, in order to support the export sector, and hence economic growth and employment. The increase in short-term investments by nonresident investors led the central bank to adopt additional measures pertaining to the foreign exchange market in January 2011.
  • The Bank of Israel implemented macro-prudential measures in the housing credit market in order to support financial stability in view of the risks deriving from the rapid rise in house prices and the expansion of housing credit.