karnit flug : the formulation of monetary policy in uncertain conditions remarks by dr karnit flug, governor of the bank of israel, at the 14th herzliya conference “ israel and the future of the middle east ”, herzliya, 9 june 2014. * * * we have recently been dealing with a murky picture regarding the real economy, in view of the fact that various data do not always reconcile with each other, creating different pictures of the state of the economy. this situation is obviously challenging for setting policy. with this background, in the last interest rate announcement, the monetary committee placed a greater than usual emphasis on the uncertainty regarding the state of the economy. in view of this, i decided to concentrate today on how monetary policy decisions are made in uncertain conditions. according to the bank of israel law, the objectives of monetary policy are first of all to maintain price stability over time, and subject to that, to support the government ’ s economic policy, and particularly growth, employment and reducing social gaps, and also to support financial stability. the bank of israel uses the policy tools available to it for this purpose : the bank of israel interest rate, intervening in the foreign exchange market according to circumstances, and prudential tools in the form of various restrictions in the mortgage market. the use of all the tools, to various extents according to circumstances, helps to achieve the various objectives and to minimize the negative effects of various tools on various other objectives. the following are the main data that we consider when making decisions. inflation and inflation expectations are within the target range, in the lower portion of the range, and inflation is expected to decline to below the target range in the coming months. gdp growth data provide a picture of a slowdown in growth during the first quarter of 2014, with growth of 2. 1 percent, and a sharp slowdown in the growth of business product ( 0. 4 percent ). it is important to emphasize that the data are obtained with a lag. the “ first vintage ” is obtained 6 weeks after the end of the quarter, and 2 updates are obtained in the months following, until the initial publication of data for the next quarter. in contrast, labor market data point to continued improvement. the unemployment rate declined and is at an historically low level of 5. 1 percent, with an increase in the participation rate and in the employment rate. a similar picture emerges from data on wages per employee post. the development of

of economic and social development. on the other hand, every government elected naturally has the desire to impact policy directions and leave its mark. this desire is brought into sharper relief when the government relies on a fragile coalition in which the composite parties will be tested at the ballot box in the not - toodistant future ( and at timing that is not always known ). such a government has an increased natural tendency toward making decisions that focus on short - term achievements rather than the alternative of following a strategic path that was outlined by the previous government, or the fruits of which may be harvested only by the next government. the test of the government ’ s strategic work will be in implementing work plans for the government ministries that are derived from the strategic plan, and the continuity of their implementation over time and during the terms of different governments. the plans must be based on an infrastructure of broad knowledge ( in this context, the bank of israel ’ s role as a professional, and independent advisory body is important ) and on high - quality staff work in the relevant ministries, monitored when necessary by the budget department. for that purposes, it is also very important to strengthen a stable professional echelon that will ensure the proper weight is given to continuity and to a long - term vision. 6 / 6 bis central bankers'speeches