6 per cent in the first and fourth quarters of next year, and just less than 6 per cent in 2017. this forecast faces sizeable risks, especially from currency depreciation as well as wage and price determination processes. with weak commodity prices and us monetary policy normalisation coming closer, we cannot be complacent about the exchange rate and its potential inflation consequences. furthermore, we confront medium - term inflation expectations bunched around the top of the target range. the risk of positive inflation shocks feeding into higher expectations and price setting remains very high. lael brainard, economic outlook and monetary policy ( http : / / www. federalreserve. gov / newsevents / speech / brainard20151012a. htm ), 12 october 2015 ; binyamin applebaum, “ a 2nd fed governor opposes raising rates this year, breaking with yellen ”, new york times ( http : / / www. nytimes. com / 2015 / 10 / 14 / business / economy / a - 2ndfed - governor - opposes - raising - rates - this - year - breaking - with - yellen. html? _ r = 0 ), 13 october 2015 bis central bankers ’ speeches were the forecast more favourable or were inflation expectations anchored firmly within the target range, monetary policy would enjoy greater freedom of action. if wage and price setting in the economy were more attuned to weak demand and the usefulness of lower inflation, we would have more policy space. but we do not have that space. it has been eroded trying to get growth back up to potential. now we have to contend with significant risks of a sustained breach of the inflation target range. for this reason, we entered a tightening cycle in january 2014, which has so far brought the repo rate 100 basis points higher, to 6 per cent. the real rate has been slightly negative and is now about zero, relative to an historical real rate averaging around 3 per cent. this gradual and limited rise, occurring over nearly two years, has shown due concern for growth while maintaining our attention on a rising inflation rate. some voices say that this is a mistake : that we should let inflation go and focus on the output gap. this advice is problematic on several levels. as economic literature has repeatedly demonstrated and as our experience has once again demonstrated, the output gap is an unreliable measure. 10 it is a poor guide for policy at the best of times. it is an even worse reason to

account the main risks to the economy as presented in the situational picture that was formulated, including in view of the continued decline in exports, the continued deviation of inflation from the target range, and the financial risks derived from the mortgage market. this policy has served, and continues to serve, in achieving policy targets, chiefly the return of inflation to within the target range, and support of economic activity and of employment. the macroeconomic picture that arises from the updated forecast, as well as the state of the labor market as shown by employment and wage figures, are positive, certainly when taking into account that the state of the global economy is far from one of high growth. the relatively good macroeconomic situation provides a fitting time to focus on solving fundamental problems in the israeli economy that may have an effect on its ability to achieve inclusive and sustainable growth. chief among those are increasing productivity, improving human capital, reducing bureaucracy, and dealing with the long - term implications of expected demographic developments. 4 / 4 bis central bankers'speeches