​Summary:

  • Inflation, economic activity, and monetary policy changed direction in 2011. In the first half of the year, as the annual inflation rate overshot the target range and the economy expanded rapidly, the Bank of Israel raised its monetary interest rate from 2 percent to 3.25 percent, continuing the trend since 2010. In the second half, as Europe's debt crisis escalated and concerns about its dampening effects on the domestic economy grew, the inflation environment declined and economic expansion slowed. In response, the Bank of Israel lowered its rate in the fourth quarter of the year to 2.75 percent by year's end. In early 2012, amid further indications of economic slowdown, the rate for February was cut by another quarter percentage point.  
  • The Consumer Price Index increased by 2.2 percent in 2011, approximating the midpoint of the target range (1-3 percent). In the first half of the year, the annual inflation rate was a brisk 4 percent; in the second half, it retreated toward the midpoint of the target range.  
  • The main contributing factors to CPI inflation in the review year were housing services (rent) and energy. The slowing of economic expansion was one of the factors behind the deceleration of price increases.  
  • In the course of 2011, the currency depreciated by 3.6 percent in nominal effective exchange rate terms (December 2011 average vs. December 2010 average).  
  • After three years of rapid increases in home prices, the housing market cooled in the review year: there were fewer transactions, a slowdown in the pace of price increases, and, toward year's end, a decrease in prices.  
  • To attain its objectives, the Bank of Israel wielded several policy tools in addition to monetary interest during the year-purchases of foreign currency (until July), imposition of a liquidity requirement on the inflow of short term foreign capital, and macroprudential measures in the mortgage loan market.  


Monetary Policy and Inflation - PDF file