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