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Inflation Report 2000, January-June
Governor's letter
Governor's letter
Jerusalem, August 1, 2000
The Inflation Report for the first half of 2000 is submitted to the government, the
Knesset, and the public as part of the process of monitoring the course of inflation
and adhering to the inflation targets set by the government, and is intended to
increase the transparency of monetary policy. Transparency in the management of
economic policy is very important for the public in Israel and for participants in the
domestic and international financial markets, particularly in view of Israel's
integration into the global economy.
The expected rate of inflation in the next one and two years, as assessed by the
Bank of Israel and other elements, is within the 3-4 percent range, which is the
inflation target set by the government. This rate is nearer than it has been in the past
to that defined as price stability-the rate prevailing in advanced economies.
The Bank of Israel's assessment of the inflation rate is based on the analysis of a
variety of developments-primarily in the area of the money supply, the interest-rate
spread between Israel and abroad, and capital flows to and from Israel, as well as
their effect on the exchange rate, on expectations, and on the various forecasts of
inflation for the horizon of one year or more; it is also based on real economic
activity in the context of fiscal policy.
The challenge currently facing monetary policy is to preserve and consolidate the
low inflation rate at a time of the considerable expansion of economic activity, such
as has been evident since 1999:II, as price stability is an important condition for
sustainable growth and job-creation.
Dangers still threaten inflation and financial stability, deriving inter alia from the
upward trend of world interest rates, and from the rapid and unexpected changes
that occur from time to time in international financial markets, which might lead to
sudden shifts in the public's assets and liabilities portfolio. In order to improve the
ability of the economy to cope successfully with these perils, it is important to
continue adhering to the norms accepted in advanced economies regarding
macroeconomic management. In this framework, it is desirable to take the following
steps:
a. Define price stability as the target for 2000 and subsequent years within the
accepted range in advanced economies, and focus monetary policy
henceforth on maintaining it.
b. The government’s budget deficit for 2001 should also be published in
accordance with the Maastrich definition, and the deficit targets determined in
the budget should also lead rapidly to the adoption of that standard. In other
words, the budget deficit (as broadly defined) should be up to 3 percent of
GDP, and the government debt should decline at a reasonable pace to a rate
of 60 percent of GDP. In this context, special attention should be paid to
adhering to budgetary discipline, particularly on the expenditure side.
Infringement on this score will harm Israel's economic standing, raise the cost
of capital, and may even curtail the green shoots of economic growth;
c. The decision-making process should be made consistent with the situation
of lasting low inflation. This involves continuing to reduce the CPI-indexed
share of government debt, placing tax regulations on a nominal basis, setting
contracts and wage agreements in the general government sector without
referring to considerations of indexation, internalizing the situation of low
inflation over time, and bringing accounting rules into line with the situation of
low inflation, including the publication of financial statements on a nominal
basis, as is generally done abroad.
In addition, several reforms that enhance the ability of the economy to withstand
shocks and help to increase its efficiency should be concluded. These include the
completion of the reform of the Foreign-currency market in order to attain full
convertibility of the NIS, making reforms in the area of pensions that will induce
pension funds to invest in the capital market instead of in earmarked bonds,
separating provident and mutual funds from the banks in order to create a more
balanced financial intermediation system, altering the minimum wage policy-
including the system for updating it-and introducing other reforms aimed at
increasing competition and efficiency.
In the last few years Israel has made great strides towards its successful integration
within the global economy. This process can be reinforced by careful management
of macroeconomic policy, stressing the fiscal responsibility and monetary stability
that have proved themselves, as well as by implementing the aforementioned and
other reforms.
This Inflation Report was prepared at the Bank of Israel within the framework of the
Senior Monetary Forum. The Forum-headed by the Governor-is the
inter-departmental team (whose members include the heads of the Monetary,
Research, Foreign Currency, and Foreign Exchange Control Departments) within
which monetary policy decisions are taken.
David Klein
Governor
Knesset, and the public as part of the process of monitoring the course of inflation
and adhering to the inflation targets set by the government, and is intended to
increase the transparency of monetary policy. Transparency in the management of
economic policy is very important for the public in Israel and for participants in the
domestic and international financial markets, particularly in view of Israel's
integration into the global economy.
The expected rate of inflation in the next one and two years, as assessed by the
Bank of Israel and other elements, is within the 3-4 percent range, which is the
inflation target set by the government. This rate is nearer than it has been in the past
to that defined as price stability-the rate prevailing in advanced economies.
The Bank of Israel's assessment of the inflation rate is based on the analysis of a
variety of developments-primarily in the area of the money supply, the interest-rate
spread between Israel and abroad, and capital flows to and from Israel, as well as
their effect on the exchange rate, on expectations, and on the various forecasts of
inflation for the horizon of one year or more; it is also based on real economic
activity in the context of fiscal policy.
The challenge currently facing monetary policy is to preserve and consolidate the
low inflation rate at a time of the considerable expansion of economic activity, such
as has been evident since 1999:II, as price stability is an important condition for
sustainable growth and job-creation.
Dangers still threaten inflation and financial stability, deriving inter alia from the
upward trend of world interest rates, and from the rapid and unexpected changes
that occur from time to time in international financial markets, which might lead to
sudden shifts in the public's assets and liabilities portfolio. In order to improve the
ability of the economy to cope successfully with these perils, it is important to
continue adhering to the norms accepted in advanced economies regarding
macroeconomic management. In this framework, it is desirable to take the following
steps:
a. Define price stability as the target for 2000 and subsequent years within the
accepted range in advanced economies, and focus monetary policy
henceforth on maintaining it.
b. The government’s budget deficit for 2001 should also be published in
accordance with the Maastrich definition, and the deficit targets determined in
the budget should also lead rapidly to the adoption of that standard. In other
words, the budget deficit (as broadly defined) should be up to 3 percent of
GDP, and the government debt should decline at a reasonable pace to a rate
of 60 percent of GDP. In this context, special attention should be paid to
adhering to budgetary discipline, particularly on the expenditure side.
Infringement on this score will harm Israel's economic standing, raise the cost
of capital, and may even curtail the green shoots of economic growth;
c. The decision-making process should be made consistent with the situation
of lasting low inflation. This involves continuing to reduce the CPI-indexed
share of government debt, placing tax regulations on a nominal basis, setting
contracts and wage agreements in the general government sector without
referring to considerations of indexation, internalizing the situation of low
inflation over time, and bringing accounting rules into line with the situation of
low inflation, including the publication of financial statements on a nominal
basis, as is generally done abroad.
In addition, several reforms that enhance the ability of the economy to withstand
shocks and help to increase its efficiency should be concluded. These include the
completion of the reform of the Foreign-currency market in order to attain full
convertibility of the NIS, making reforms in the area of pensions that will induce
pension funds to invest in the capital market instead of in earmarked bonds,
separating provident and mutual funds from the banks in order to create a more
balanced financial intermediation system, altering the minimum wage policy-
including the system for updating it-and introducing other reforms aimed at
increasing competition and efficiency.
In the last few years Israel has made great strides towards its successful integration
within the global economy. This process can be reinforced by careful management
of macroeconomic policy, stressing the fiscal responsibility and monetary stability
that have proved themselves, as well as by implementing the aforementioned and
other reforms.
This Inflation Report was prepared at the Bank of Israel within the framework of the
Senior Monetary Forum. The Forum-headed by the Governor-is the
inter-departmental team (whose members include the heads of the Monetary,
Research, Foreign Currency, and Foreign Exchange Control Departments) within
which monetary policy decisions are taken.
David Klein
Governor
Summary
* In the first half of 2000 (the period reviewed) the Consumer Price Index (CPI) rose
by 0.4 percentage points, an annual rate of 0. 8 percent-below the 3-4 percent
inflation target for 2000 and 2001. This low rate, however, was influenced by the 3.2
percent appreciation of the NIS against the currency basket as a result of large
capital inflows from nonresidents as well as by seasonal factors. On the basis of
inflation expectations derived from the capital market and various assessments of
future inflation, the annual inflation rate is expected to rise to 3-4 percent in the
second half of 2000 and in 2001.
* During the period reviewed the Bank of Israel reduced its key interest rate by a
cumulative 1.9 percentage points to 9.3 percent, after a 2.3 percentage-point
reduction in 1999, the object being to attain the inflation target set by the
government for 2000 and 2001. At the end of July the Bank announced that its key
interest rate for August would be reduced by 0.2 percentage points. The pace at
which interest was cut was determined inter alia by the rise of world interest rates,
particularly in the US, in view of Israel’s openness to capital flows.
* Alongside the consolidation of inflation at a low rate, the rally in real economic
activity evident since 1999:II persisted. This was led primarily by the acceleration of
exports, due in part to the marked expansion of world trade and a rise in world
growth rates. The rally was accompanied by a notable rise-that exceeded
expectations-in the government’s tax receipts, so that the actual budget deficit will
apparently be well below the ceiling set by the government for 2000 at 2.5 percent of
GDP.
* The consolidation of inflation at a relatively low rate is also noteworthy in view of
the changing background conditions in Israel and abroad. In 2000:I share prices
soared in the US, contributing to the surge in capital inflows to Israel by
nonresidents and to local-currency appreciation. In 2000:II these trends reversed:
world stock markets slumped and capital inflow to Israel by nonresidents fell, leading
to local-currency depreciation. In this quarter the recommendations of the committee
set up to reform the direct taxation of individuals (the Ben-Bassat Committee) were
published, adding to the uncertainty that had been generated by the withdrawal of
troops from Lebanon and the general political situation. Nevertheless, none of these
factors prevented Israel’s inflation rate from approaching those prevailing in
advanced economies and defined there as price stability.
* In light of the current inflation rate, it is important for the government to decide that
long-term inflation should be within the 1 - 3 percent range - to be defined as price
stability in Israel, too - for 2002 and subsequent years. Setting a framework of this
kind will enhance the commitment to a stable, low inflation rate and hence contribute
to the efficient conduct of monetary policy. It will also enable the Bank of Israel to
maintain price stability with generally lower interest rates than are required by current
practice, whereby every now and again the government determines inflation targets
for set periods.
Contents
Summary
1. The CPI and the Inflation Target
2. Monetary Policy and its Indicators
a. Monetary policy
b. Indicators guiding monetary policy
3. The Expected Development of Inflation in 2000 and 2001 and the Next
Two Years
a. Expected development of the main variables affecting inflation
b. Assessments of inflation and the balance of risks
Appendix 1:
Monetary Policy: the Government’s Guidelines
Appendix 2:
Press Releases Regarding Monetary Policy Monthly Programs, January 2000-
August 2000
* In the first half of 2000 (the period reviewed) the Consumer Price Index (CPI) rose
by 0.4 percentage points, an annual rate of 0. 8 percent-below the 3-4 percent
inflation target for 2000 and 2001. This low rate, however, was influenced by the 3.2
percent appreciation of the NIS against the currency basket as a result of large
capital inflows from nonresidents as well as by seasonal factors. On the basis of
inflation expectations derived from the capital market and various assessments of
future inflation, the annual inflation rate is expected to rise to 3-4 percent in the
second half of 2000 and in 2001.
* During the period reviewed the Bank of Israel reduced its key interest rate by a
cumulative 1.9 percentage points to 9.3 percent, after a 2.3 percentage-point
reduction in 1999, the object being to attain the inflation target set by the
government for 2000 and 2001. At the end of July the Bank announced that its key
interest rate for August would be reduced by 0.2 percentage points. The pace at
which interest was cut was determined inter alia by the rise of world interest rates,
particularly in the US, in view of Israel’s openness to capital flows.
* Alongside the consolidation of inflation at a low rate, the rally in real economic
activity evident since 1999:II persisted. This was led primarily by the acceleration of
exports, due in part to the marked expansion of world trade and a rise in world
growth rates. The rally was accompanied by a notable rise-that exceeded
expectations-in the government’s tax receipts, so that the actual budget deficit will
apparently be well below the ceiling set by the government for 2000 at 2.5 percent of
GDP.
* The consolidation of inflation at a relatively low rate is also noteworthy in view of
the changing background conditions in Israel and abroad. In 2000:I share prices
soared in the US, contributing to the surge in capital inflows to Israel by
nonresidents and to local-currency appreciation. In 2000:II these trends reversed:
world stock markets slumped and capital inflow to Israel by nonresidents fell, leading
to local-currency depreciation. In this quarter the recommendations of the committee
set up to reform the direct taxation of individuals (the Ben-Bassat Committee) were
published, adding to the uncertainty that had been generated by the withdrawal of
troops from Lebanon and the general political situation. Nevertheless, none of these
factors prevented Israel’s inflation rate from approaching those prevailing in
advanced economies and defined there as price stability.
* In light of the current inflation rate, it is important for the government to decide that
long-term inflation should be within the 1 - 3 percent range - to be defined as price
stability in Israel, too - for 2002 and subsequent years. Setting a framework of this
kind will enhance the commitment to a stable, low inflation rate and hence contribute
to the efficient conduct of monetary policy. It will also enable the Bank of Israel to
maintain price stability with generally lower interest rates than are required by current
practice, whereby every now and again the government determines inflation targets
for set periods.
Contents
Summary
1. The CPI and the Inflation Target
2. Monetary Policy and its Indicators
a. Monetary policy
b. Indicators guiding monetary policy
3. The Expected Development of Inflation in 2000 and 2001 and the Next
Two Years
a. Expected development of the main variables affecting inflation
b. Assessments of inflation and the balance of risks
Appendix 1:
Monetary Policy: the Government’s Guidelines
Appendix 2:
Press Releases Regarding Monetary Policy Monthly Programs, January 2000-
August 2000
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Previous Inflation Reports: |
Inflation Report 1999 (July - December)
|
|
Inflation Report 1999 (January - June)
|
|
Inflation Report 1998 (January - June)
|
|
Inflation Report 1997
|