Lecture by Andrew Abir, Director of the Market Operations Department and member of the Bank of Israel Monetary Committee, on the management of monetary policy in an age of low inflation
Presentation (Hebrew) Andrew Abir, Director of the Bank of Israel's Market Operations Department, and a member of the Bank of Israel Monetary Committee, delivered a lecture at the Meitav Dash investment firm, and discussed the monetary policy being conducted by the Bank of Israel in an age of low inflation.
Abir first discussed the long-term trends in inflation and the central bank interest rates in Israel and the US. He emphasized that the low inflation in Israel and abroad is a result of a process that began back in the 1990s, in view of demographic factors, the aggressive monetary policy conducted in the past few decades to lower inflation, and the adoption of inflation target regimes by central banks around the world. As a result of the low inflation, Abir emphasized, the interest rate environment in Israel and abroad is also low.
Abir presented the structure change in the composition of Israeli exports. The volume of Israel services exports increased more rapidly than in other OECD countries. In contrast, starting in 2015, Israeli goods exports grew more slowly than in other OECD countries. One of the reasons for this is the real appreciation of the shekel in recent years, and the fact that goods exports are more sensitive to changes in the exchange rate than are services exports.
Abir discussed the good state of the labor market, which is reflected in low unemployment over time, an increase in the labor force participation rate, and an increase in real wages led by the business sector. The increase in wages has not, for the time being, led to an increase in the inflation rate.
Abir presented the path of the development of inflation. Since 2014, inflation has fluctuated below the target range, and was even negative for some of that time. This is the main reason why monetary policy was very accommodative during that period. Over the last year, inflation has moved back inside the target range, but at the lower end of the range. Some of the previous decline in inflation was due to a decline in the inflation originating abroad, which led the index of tradable goods to be negative in recent years. The index of nontradable goods, which is an approximation of domestic inflation, was within the target range for most of the period, and was in any case not negative.
In addition to the low interest rate, the accommodative monetary policy included additional measures such as intervention in the foreign exchange market and the purchase of government bonds. Abir explained that with the return of inflation to within the target range, the Bank of Israel began a process of normalization that was reflected in an increase in the interest rate in November 2018, among other things. However, inflation at this stage is still near the bottom of the target range, and there are few signs of an acceleration toward the midpoint of the range. Abir emphasized that the path for raising the interest rate will remain consistent with achieving the targets of monetary policy.
In conclusion, Abir discussed the challenges of monetary policy looking forward. One significant challenge is the slowdown in the global economy. World trade continues to weaken in view of the moderation in global economic activity and the continuing trade wars. As a result of this slowdown, there has recently been a change of direction in the monetary policy of major economies. The Federal Reserve lowered the likelihood of another interest rate increase this year, and the market has even begun pricing in a decline in the interest rate in the US. In addition to the Fed, the ECB is not currently expected to begin the process of raising its interest rate. As such, those two central banks have for now halted the process of retreating from accommodative monetary policy including negative interest rates in some of the large markets. Another challenge that will affect monetary policy, according to Abir, is developments in the exchange rate. The depreciation of the shekel in 2018 has been partly reversed, and if the appreciation continues, as the Monetary Committee has emphasized, it may delay the increase of inflation toward the midpoint of the target range.