karnit flug : recent economic and financial developments in israel remarks by dr karnit flug, governor of the bank of israel, at the press conference presenting the bank of israel 2016 annual report, tel aviv, 29 march 2017. * * * in 2016, gdp grew strongly by 4 percent — higher than growth in most advanced economies. private consumption led growth, while export growth was relatively moderate, similar to the moderate growth of world trade. the labor market is robust. the economy is close to full employment and real wages increased, supporting the increase in private consumption. inflation remained low despite the increase in demand, and was affected by the low inflation worldwide and by the appreciation of the shekel, which were reflected in lower - priced imported goods, and by a change in consumption patterns and the transition to imports via the internet, which led to increased competition among consumer products and reduced prices. despite inflation remaining lower than the target range, long - term inflation expectations are anchored around the center of the target range. this means that market players continue to maintain confidence in the inflation target regime. monetary policy remained accommodative and supported growth. the interest rate remained at 0. 1 percent, and the bank of israel continued to purchase foreign exchange in order to reduce overappreciation. expansionary fiscal policy also supported growth. the budget deficit was about 2 percent of gdp, similar to its level in the previous year, and lower than the ceiling. however, the cyclically - adjusted deficit increased. the debt to gdp ratio continued to decline, to 62 percent, due to the growth and the level of the deficit, and also due to transitory factors including the rapid increase of the gdp deflator alongside declining consumer prices, and an exceptional increase in tax revenues from vehicle imports and real estate transactions. government expenditure on investment in human capital ( expenditure per student ) and physical capital, despite increasing in the past two years, remains low by international comparison, and the low level of basic skills and of infrastructure impairs potential growth in the economy. economic policy measures with long - term results are necessary. a significant and efficient investment in improving education and infrastructure will make it possible to increase labor productivity and the economy ’ s growth potential, thereby contributing to an increase in the standard of living of all israelis. such investment is the key to sustainable inclusive growth. the good state of the economy is precisely the opportunity to adopt such a policy. in 2016, the economy grew strongly, by 4

percent — higher than most other advanced economies ( even net of the exceptionally high purchases of vehicles ). growth was led again this year by private consumption, while export growth was relatively moderate — similar to the increase in world trade, after exports grew less than world trade in the past two years. the weakness of exports, particularly goods exports that were lower than world trade in goods, reflects the effect of the appreciation of the shekel. according to updated estimates presented in the bank of israel annual report, the pass - through from the real exchange rate to exports ranges from 0. 3 to 0. 6 over about 2 years. the labor market continued its solid performance this year as well, and is close to full employment, as shown by the low unemployment rate ( 3. 7 percent among those aged 25 – 64 ), the continued increase in the employment rates to a record level of 77 percent — high both historically and by international comparison — the high job vacancy rate, and the increase in real 1 / 4 bis central bankers'speeches wages — 2. 9 percent in the past year — which is led by the business sector. against this background, monetary policy acted to return inflation to the target range and supported the good results seen in economic activity and employment. inflation remained lower than the target range, even after some increase, but it is important to note that long - term ( 5 – 10 years ) inflation expectations consistently remain anchored around the center of the target range, as market players maintain their confidence in the inflation target regime. it is important to examine the factors impacting on inflation : in view of the performance of the economy and the labor market, it is clear that the low inflation does not derive from moderate domestic demand. in the past 3 years there were several factors acting to reduce inflation, and some of them are near to being exhausted ; in the past year factors began acting toward increasing inflation, and we assess that their continuation is expected to support an increase in inflation to within the target range. the low inflation worldwide until the past several months, and in particular in g4 countries ( us, eurozone, japan and the uk ) acted to moderate inflation in israel. at the same time, the appreciation also acted toward marked reducing prices of imported goods, as well as of goods that are produced in israel but compete with imported goods. thus, the price index of tradable goods declined by 1. 7 percent last year after a decline of 3. 3 percent in the previous year. an examination