Bank of Israel - Press Releases - Remarks by Andrew Abir, Director of the Bank of Israel’s Market Operations Department: “Monetary Policy in the Era of Low Inflation”
Central bank: boi | Type: statement | Date: 2018-02-08

Is monetary policy succeeding in meeting its
targets?  The labor market is at full
employment, and the economy is growing in line with its potential growth
rate.  The main transmission mechanism
from monetary policy to real activity has, in the past several years, operated
mainly through the policy’s effect on private consumption, which has led
economic growth.  However, the inflation
environment remains below the target. 
Some of the decline in inflation reflects the “import” of low inflation
from abroad which, together with the effect of the shekel’s appreciation, leads
to a decline in the prices of tradable goods. 
In Israel, inflation was also impacted by price reductions initiated by
the government, while structural changes that are increasing competition in the
market are acting to reduce inflation. 
These are desirable changes that are affectingprice levels, and
monetary policy is not trying to act against them or to offset them.  However, a prolonged decline ofthe
inflation rateto below the target may have negative ramifications for
economic activity over time, and the Bank of Israel’s monetary policy is
therefore expected to remain accommodative as long as necessary in order to
entrench the inflation environment within the target range.
Abir discussed the gaps in consumer price levels
between Israel and other OECD countries, and noted that there is a high
correlation between the level of the real exchange rate and the price gap.  Currently, the shekel is appreciated, so
price levels in Israel are higher than abroad, since the appreciation lowers
prices abroad in shekel terms more than prices in the domestic economy, where
it only affects the prices of tradable goods. 
A real depreciation may narrow the price gap, as it was, for instance,
in the middle of the previous decade.​