Summary:
- The Consumer Price Index (CPI) dropped by 0.1 percent in 2006, and for most of the year the actual development of prices deviated from the target-mainly from above in the first half of the year and from below in the last quarter.
- The variance in the development of prices during the year derived primarily from the variance in the development of the NIS exchange rate vis-?-vis the dollar-depreciation from mid-2005 to February 2006, and appreciation during the rest of the year. This variance was also influenced by the variance in fuel and energy prices ,which rose sharply at the beginning of the year and plummeted at the end of it.
- Rapid economic growth continued in 2006, due mainly to increased demand, as had been the case in the preceding two years, exerting upward pressure on domestic prices during the year.
- In the wake of actual price developments and inflation expectations, the Bank of Israel raised the interest rate three times during the course of the first third of the year, by a cumulative 0.75 percentage points, and by another 0.25 percentage points during the war, in August. In the last quarter this trend was reversed and the interest rate was reduced twice by a cumulative 0.5 percentage points, and by another 0.75 percentage points in the first two months of 2007.
- The interest-rate reduction at the end of 2006 and beginning of 2007 led to a negative 1 percentage-point differential between the Bank of Israel's key interest rate and that of the US Federal Reserve. This unprecedented differential was supported by Israel's economic fundamentals, and particularly by the considerable surplus in the balance of payments on current account.
Inflation and Monetary Policy - Full File