karnit flug : the challenges facing short - and long - term economic policy main point of remarks by dr karnit flug, governor of the bank of israel, at the calcalist conference “ the challenges facing short - and long - term economic policy ”, tel - aviv, 30 december 2015. * * * i would like to relate in these remarks to the challenges facing macroeconomic policy : monetary policy, under the auspices of the bank of israel, which is focused on smoothing the short - term effect of volatility in the economy ( business cycles ) on inflation and on growth and employment ; and fiscal and structural policy, which is focused on achieving inclusive growth that will support an increase in the standard of living of the entire population over time. two days ago, the bank of israel research department published its macroeconomic forecast for the coming two years, from which we can assess the trends forecast for the short term. the growth forecast was revised downward, influenced by a further downward revision of global growth and global trade forecasts. the forecast projects continued moderate growth of 2. 8 percent in 2016, and some acceleration in the following year. exports are expected to grow in accordance with the global trade forecast, and private consumption is expected to moderate slightly, following a relatively sharp increase in 2015. this is the main scenario of the forecast. however, it is important to remember that there is uncertainty surrounding the forecast – as there is with any forecast – as presented graphically in the fan chart ( which presents the range of projections with a likelihood of 66 percent ). some of the uncertainty regarding growth in israel is derived from similar uncertainty that exists in relation to the global environment that will exist during that period. it is important to remember that monetary policy affects inflation and growth with a lag. in other words, it is forward - looking, and therefore, by definition, it operates under uncertainty. another illustration of the uncertainty, as well as the dynamism, of the environment in which we are operating can be seen in the significant revisions of the forecasts made by the international organizations ( in this case the imf ) in relation to global growth and – even more importantly for the israeli economy – in relation to growth in global trade. during the past year, the forecast for global trade was revised downward by 2 percentage points for each of the years 2015 and 2016, which obviously has an impact on the forecast for israeli exports, and therefore on the growth of the economy in general.

as we know, inflation has been very low for the past two years – far below the inflation target – and is expected to remain low during the coming year as well. despite that, it is important to note that the inflation target regime continues to enjoy trust, as shown in the medium and longer - term inflation expectations. the low inflation is to a large extent the result of commodity and energy price declines and of price reductions initiated by the government. in the past year, these factors were responsible for a 1. 7 percentage point decline in the cpi, such that the cpi excluding these factors increased by 0. 8 percent. in this context, it is important to emphasize that monetary policy does not aim to offset such one - off factors, but rather is forward looking, and acts to gradually return inflation to within the target range. by the way, for the coming months, the government has already made decisions to reduce prices that together come to 0. 4 percentage points of the cpi. another factor that has an impact on both activity and inflation is obviously the exchange rate. the ( effective ) appreciation of the shekel, which is impacted by the surplus in the current account and by the very accommodative policies of the major central banks, makes it difficult for exports to grow under conditions where demand for israeli exports is in any case moderate, and acts to further moderate inflation. our assessment is that at its current level, the shekel is over - appreciated relative to what is in line with the basic economic forces, and we are therefore continuing to operate in the foreign exchange market. bis central bankers ’ speeches against this background, the bank of israel has used a variety of policy tools : an accommodative interest rate policy, together with a declaration that the monetary committee ’ s assessment is that policy is expected to remain accommodative for a considerable time, intervention in the foreign exchange market in order to prevent an even sharper appreciation, and a series of prudential measures to deal with the risks inherent in the housing market. another factor taken into account in the bank of israel ’ s policy is the housing market. home prices that have been increasing since 2007, and with them mortgage volumes, and which have also been affected by the low interest rate environment, are sources of concern to us from both the financial stability aspect of borrowers ’ ability to repay, and the social aspect of affordability – the economic ability of a household to provide itself with housing services. it is