Financial Markets

The Bank of Israel conducts its interest rate policy with the intention of attaining the inflation rate target set by the government. To that end, the Bank uses various monetary tools, including monetary loans to banking corporations, accepting monetary deposits from the banking corporations, a credit window and a deposit window, MAKAM (short-term Bank of Israel loan) issues, open market operations, and repos.

Deposit and/or loan auctions for the banks: These constitute the main tools used by the Bank to achieve the interest rate, because of the precision and speed of their effect. The Bank of Israel invites the banks to participate in auctions to borrow money from it for periods of one day or one week, or to deposit money with it for short periods - according to the situation in the money market and the rates of interest set in the auctions. Against loans they take from the Bank, the banks put up collateral, including government bonds and short-term loan certificates (known by their Hebrew acronym, MAKAM).

The monetary loans and deposits window: The Bank of Israel makes a window for monetary loans (against collateral) available to the banking corporations, with the interest on the loans set at a certain amount higher than the Bank's headline interest rate.  The Bank of Israel also makes a window for monetary deposits available to the banking corporations, with the interested on the deposits set at a certain amount below the Bank's headline interest rate.
 
Central bank bills (MAKAM): These are short-term securities (up to one year) issued by the Bank of Israel to affect the level of the interest rate in the money market. They are issued to the general public. Their yield is determined in trading on the stock exchange and can be used to calculate the public's inflation expectations and expectations of changes in monetary policy.

Repo: A repurchase agreement (repo) is a transaction in which the Bank of Israel sells, possibly by auction, government bonds and MAKAM to banks and financial institutions, and buys them back after one week at a pre-set price. In a reverse repo, the Bank of Israel purchases the government bonds and MAKAM from the banks and financial institutions, and sells them back after one week at a pre-set price. In the case of a reverse repo, the amount paid by the Bank of Israel for those securities serves to increase liquidity in the economy. The difference between the price at which the Bank of Israel buys the securities and the price at which it sells them back represents the interest. Repos are one of the important tools used by central banks in many advanced economies to conduct monetary policy.

Open market operations: Another tool that the Bank of Israel uses to provide liquidity is the purchase and sale of various types of government bonds for various terms in the secondary market.