Dr. Nadine Baudot-TrajtenbergDeputy Governor of the Bank of Israel

September 14th,, 2017

1

Recent Challenges of Inflation Targeting in Israel

Bank of Canada

• 1970’s and early 80’s: Hyperinflation

• 1985: Tackling Hyperinflation with

both orthodox and unorthodox

policies

• 1994: BoI makes active use of interest

rate policy to attain an inflation target

(a gradually falling inflation target)

• 1997: BoI has a de facto fully flexible

exchange rate regime

• 2003: Introduction of the present

day inflation target of 1%-3%

2

-3

-1

1

3

5

7

9

11

13

15

01/9

4

04/9

5

07/9

6

10/9

7

01/9

9

04/0

0

07/0

1

10/0

2

01/0

4

04/0

5

07/0

6

10/0

7

01/0

9

04/1

0

07/1

1

10/1

2

01/1

4

04/1

5

07/1

6

After a decade of disinflation process, Israel roughly reaches Price Stability in 2003

Annual Inflation, and ten year Inflation

expectations – 1/1994-8/2017

Bank of Israel’s Objectives as defined by the Bank of Israel Law of 2010

1) Maintain price stability – top line inflation

target of between 1%-3% within a 24 months

period

2) Support economic policy: growth, employment

and reducing social gaps

3) Support the stability and orderly activity of

financial system

3

-4

-2

0

2

4

6

8

10

4 SOURCE: IMF

Forecast

Israel

Developing

Economies

Advanced

Economies

Israel weathered successfully the GFCGDP annual % change (2000-2018F)

3.9

64

66

68

70

72

74

76

78

80

82

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

11.5

12.5 79.9

5

Participation Rate

Employment rate

Unemployment rate

Israel has a Strong Labor MarketQuarterly, 1995-2017, ages 25-64

%

Source : Central Bureau of Statistics Labor Force Survey

%

76.8

Nominal wages continue to increase

ועיבודי בנק ישראלס"למ: מקור ס ועיבודי בנק ישראל"למ: מקור

SOURCE: Central Bureau of Statistics.

0

1

2

3

4

5

6

%

Nominal Wages per Employee PostSeasonally adjusted, moving 3-month average, % change compared with the

same period in the previous year,

1/2013 – 5/2017

Total Business sector Public services

3.9

3.3

4.3

Forecast

0

10

20

30

40

50

60

70

80

90

100

110

120

130 World Trade

Israel

Israel’s G&S Exports* and World Trade**2008=100, 1995-2017F

7 SOURCE: IMF and the Central Bureau of Statistics (Israel)

20

08

=1

00

** What the MPC was seeing in January 2017 * (excl. diamonds and start-ups

The Appreciation of the Effective Exchange Rate Contributed to Low Inflation and impacted Exports

Source: BoI

Nominal Effective Exchange Rate,

2009-8/2017

8

70

75

80

85

90

95

100

105

110

01/09 01/10 01/11 01/12 01/13 01/14 01/15 01/16 01/17

NEER

9

%

Range of ±25%

from the median

Source: BOI & OECD

Israel’s inflation environment still low compared to trading partners

12-month Inflation in Israel and OECD, 2008-2017

OECD(median)

Israel

-2

0

2

4

6

8

01/

08

05/0

8

09/0

8

01/

09

05/0

9

09/0

9

01/

10

05/1

0

09/1

0

01/

11

05/1

1

09/1

1

01/

12

05/1

2

09/1

2

01/

13

05/1

3

09/1

3

01/

14

05/1

4

09/1

4

01/

15

05/1

5

09/1

5

01/

16

05/1

6

09/1

6

01/

17

05/1

7

Inflation of Tradeable and Non-tradeable, 2006-2017,Monthly, 12-month percent change

-4.5

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

8.5

10

Non

Tradeable

Tradeable

Source: BoI

-2

-1

0

1

2

3

4

Persistently low inflation – 2013-1017

Actual inflation

%

11

Actual inflation

Inflation excluding energy prices, fruits & vegetables , regulated prices

2013-2017

Inflation excluding energy prices, fruits

& vegetables , regulation

Source: BoI, CBS

Israeli Consumers Face High Prices, 2014

Source: OECD12

0 20 40 60 80 100 120 140 160 180

Communication

Education

Hospital services

Fish

Individual services

Consumer services

Recreation and culture

Health

Housing, water, electricity, gas and other fuels

Food and non-alcoholic beverages

Consumer goods

Transport

Tobacco

Non-alcoholic beverages

Other food

Durable goods

Milk, cheese and eggs

OECD=100

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

0

10

20

30

40

50

60

TonsMillions if units

The expansion of personal imports from abroad in recent years as part of a change in consumer behavior

An increase in the transfer of packages

from abroad to Israel

Annual, 2006-2016

13 Source: BoI report, 2016

Systematically overestimating inflation

-4

-3

-2

-1

0

1

2

3

4

5

6

01

/08

05

/08

09

/08

01

/09

05

/09

09

/09

01

/10

05

/10

09

/10

01

/11

05

/11

09

/11

01

/12

05

/12

09

/12

01

/13

05

/13

09

/13

01

/14

05

/14

09

/14

01

/15

05

/15

09

/15

01

/16

05

/16

09

/16

01

/17

05

/17

14 Source: BoI

One year inflation expectations deviation from actual CPI

01/2008 – 08/2017

%

-2

-1

0

1

2

3

4

5

6

01/0

8

05/0

8

09/0

8

01/0

9

05/0

9

09/0

9

01/1

0

05/1

0

09/1

0

01/1

1

05/1

1

09/1

1

01/1

2

05/1

2

09/1

2

01/1

3

05/1

3

09/1

3

01/1

4

05/1

4

09/1

4

01/1

5

05/1

5

09/1

5

01/1

6

05/1

6

09/1

6

01/1

7

05/1

7

Bank of Israel dropped its interest rate til 0.1%01/2008-8/2017

15

12 month CPI and BoI interest rate

01/2008 – 07/2017

Monetary Policy – FX Intervention2007-07/2017

16

GazProgramMkt Intervention

Source: BoI

Reserve Building

Months of imports

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

01

/07

07

/07

01

/08

07

/08

01

/09

07

/09

01

/10

07

/10

01

/11

07

/11

01

/12

07

/12

01

/13

07

/13

01

/14

07

/14

01

/15

07

/15

01

/16

07

/16

01

/17

FX INTERVENTION

-1

1

3

5

7

9

11

13

$0

$20

$40

$60

$80

$100

$120

FX Reserves at the BoIBillions of US $ and X times monthly Imports

Central Bank FX Reserves Index, SOE’sindex 2000=100, 2000-2017

0

500

1000

1500

2000

2500

90

290

490

690

890

1090

1290

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Czech Republic New Zealand Israel Korea Sweden Switzerland (Right Axis)

Source: IMF17

Monetary Policy: Forward Guidance

• Oct 27th 2016 : “The Monetary Committee continues to

assess that in view of the inflation environment, and of

developments in the global economy, in the exchange

rate, as well as in monetary policies of major central

banks, monetary policy will remain accommodative

for a considerable time.”

• April 6th 2017 : ”The Monetary Committee intends to

maintain the accommodative policy as long as

necessary in order to entrench the inflation

environment within the target range.”

18

0.00

1.00

2.00

3.00

4.00

1-3 3-5 5-10

Medium Term expectations returning within the target range and LT Expectations well anchored

Source: BoI19

• 1-3 year inflation

expectations

stand at 0.79%

• 3 year inflation

expectations in 3

years 'time

(inflation

forward 3-5

years) stand at

1.42%

• 5-10 year

inflation

expectations are

stable at about

2%

Inflation Expectations for the medium and

long term based on forward prices

03/2015 – 08/2017

Concluding words

1. Patience does not entail inaction

Protracted periods of below target inflation do not entail an automatic loss

of monetary policy credibility.

Better understand, and better explain, how the transmission mechanism

Use more tools and more targeted tools

2. The Israeli experience does not lead to the need of changing the

inflation target

An important anchor for the economy must not be amenable to easy

change unless there is strong evidence that it is no longer at the

appropriate level.

3. Monetary policy must take into account financial conditions as

signaled by the markets.

As upholder of a necessary and crucial nominal anchor it must be able to

withstand noise and “flavor of the day” pressures.

Open discussions and clearer explanations

20

21

Thank you