• The consumer price index rose by 3.8 percent in 2008, the second consecutive year when it exceeded the upper limit of the inflation target of 1-3 percent a year.  
  • Inflation did not follow a uniform path during the year: it was high during the first half of the year, continuing the previous year’s trend, due to the large increases in world prices for energy and food and to vibrant local activity. During the second half of the year the inflation environment fell heavily as a result of the sharp drop in energy prices and worldwide commodity prices, the slowdown in local real activity, and the worsening of the global financial crisis from September onwards. In the fourth quarter, inflation expectations for twelve months ahead actually fell to a negative rate. The accelerating housing item prevented a more substantial decline in inflation during the second half.  
  • Monetary policy during the year was conducted against the background of the global crisis that began in the summer of 2007 and worsened during 2008. Until September inflation was above the upper limit of the targeted level concurrent with expectations of a recession in financial and real activity. This background led to frequent changes in the direction of the interest rate, because of frequent changes in the assessment of the scale and timing of economic risks: the interest rate for January was increased by 0.25 percentage points, to 4.25 percent; in each of the months March and April it was cut by 0.50 percentage points, and starting from June it was increased by four consecutive steps of 0.25 percentage points each, back to a rate of 4.25 percent.  
  • From September onwards, in view of the worsening of the global crisis and growing signs of a major downturn in real activity, all the considerations employed in interest rate decisions supported sharp reductions in the rate, which was cut to a historically low level: at the end of the year it stood at 2.5 percent. The rate cuts continued at the beginning of 2009 as well, and as the rate approached its zero bound there was a need to employ additional policy tools. Thus, in February 2009 the Bank of Israel announced it would start operating in the secondary market of local government bonds, so as to directly influence long term interest rates.  
  • After more than a decade without intervention in the foreign-exchange market, in 2008 the Bank of Israel began to purchase foreign currency, intending to increase the country’s foreign exchange reserves. The timing of the purchasing program was picked according to the sharp and continuous appreciation of the NIS, which supported the increase in the reserve in a manner consistent with other monetary-policy objectives.  
  • Credit and liquidity data indicated that certain sectors were beginning to suffer from credit difficulties, as was expected in view of the slowdown in real activity and the increased perception of risk by the financial sector. Since mid-September, activity in the IPO market for nonbanking credit was restrained. However, these developments were not indicative of a liquidity problem that was prevalent in the American and European economies (mainly since September).  

Inflation and Monetary Policy - Full File