Summary:
- The Consumer Price Index rose by 2.4 percent in cumulative terms in 2005, more than in recent years but within the price-stability target range of 1–3 percent.
- The upturn in inflation in 2005 traced mainly to relatively rapid NIS depreciation against the dollar (after two years of appreciation) and the continued upward march of oil prices globally.
- Domestic demand and wage increases did not generate perceptible pressure on prices, despite the acceleration in growth. The restraining effect of prices that typified the past few years, however, has diminished and may even have passed.
- Monetary policy continued to strive for price stability and was supported by a fiscal policy that was aimed at reducing the budget deficit and the government debt, and that made the target attainable at relatively low interest rates.
- In the first two months of the year, in view of very sluggish price developments and below-target inflation expectations, the rate-cutting process continued. Subsequently, until September, the Bank of Israel key rate was left unchanged at a low 3.5 percent.
- Only in Q4, when forces auguring pressure on prices became visible, did the Bank of Israel begin to raise the rate and increased it by a total of one percentage point by the end of the year.
Inflation and Monetary Policy - Full File