Bank of Israel - Press Releases - Lecture by Andrew Abir on the management of monetary policy in an age of low inflation
Central bank: boi | Type: statement | Date: 2019-05-06

Lecture by Andrew Abir, Director of the Market
Operations Department and member of the Bank of Israel Monetary Committee, on
the management of monetary policy in an age of low inflation
Andrew Abir, Director of the Bank
of Israel's Market Operations Department, and a member of the Bank of Israel
Monetary Committee, delivered a lecture at the Meitav Dash investment firm, and
discussed the monetary policy being conducted by the Bank of Israel in an age
of low inflation.
Abir first discussed the
long-term trends in inflation and the central bank interest rates in Israel and
the US.  He emphasized that the low
inflation in Israel and abroad is a result of a process that began back in the
1990s, in view of demographic factors, the aggressive monetary policy conducted
in the past few decades to lower inflation, and the adoption of inflation
target regimes by central banks around the world.  As a result of the low inflation, Abir
emphasized, the interest rate environment in Israel and abroad is also low.​
Abir presented the structure
change in the composition of Israeli exports. 
The volume of Israel services exports increased more rapidly than in
other OECD countries.  In contrast,
starting in 2015, Israeli goods exports grew more slowly than in other OECD
countries.  One of the reasons for this
is the real appreciation of the shekel in recent years, and the fact that goods
exports are more sensitive to changes in the exchange rate than are services
exports.
Abir discussed the good state of
the labor market, which is reflected in low unemployment over time, an increase
in the labor force participation rate, and an increase in real wages led by the
business sector.  The increase in wages
has not, for the time being, led to an increase in the inflation rate.
Abir presented the path of the
development of inflation.  Since 2014,
inflation has fluctuated below the target range, and was even negative for some
of that time.  This is the main reason
why monetary policy was very accommodative during that period.  Over the last year, inflation has moved back
inside the target range, but at the lower end of the range.  Some of the previous decline in inflation was
due toa decline in the inflation originating abroad, which led
the index of tradable goods to be negative in recent years.  The index of nontradable goods, which is an
approximation of domestic inflation, was within the target range for most of
the period, and was in any case not negative.
In addition to the low interest
rate, the accommodative monetary policy included additional measures such as
intervention in the foreign exchange market and the purchase of government
bonds.  Abir explained that with the
return of inflation to within the target range, the Bank of Israel began a
process of normalization that was reflected in an increase in the interest rate
in November 2018, among other things. 
However, inflation at this stage is still near the bottom of the target
range, and there are few signs of an acceleration toward the midpoint of the
range.  Abir emphasized that the path for
raising the interest rate will remain consistent with achieving the targets of
monetary policy.
In conclusion, Abir discussed the
challenges of monetary policy looking forward. 
One significant challenge is the slowdown in the global economy.  World trade continues to weaken in view of
the moderation in global economic activity and the continuing trade wars.  As a result of this slowdown, there has
recently been a change of direction in the monetary policy of major
economies.  The Federal Reserve lowered
the likelihood of another interest rate increase this year, and the market has
even begun pricing in a decline in the interest rate in the US.  In addition to the Fed, the ECB is not
currently expected to begin the process of raising its interest rate.  As such, those two central banks have for now
halted the process of retreating from accommodative monetary policy including
negative interest rates in some of the large markets.  Another challenge that will affect monetary
policy, according to Abir, is developments in the exchange rate.  The depreciation of the shekel in 2018 has
been partly reversed, and if the appreciation continues, as the Monetary
Committee has emphasized, it may delay the increase of inflation toward the
midpoint of the target range.​