The main objectives of the Bank are listed and prioritized in the Law: To maintain price stability; to support other objectives of the Government's economic policy, especially growth, employment, and reducing social gaps; and supporting the stability of the financial system.
3(a)(1) "To maintain price stability as its central goal."
The main function of the Bank of Israel is to maintain price stability, i.e., to preserve the currency's purchasing power. Monetary policy is primarily directed towards attaining this objective, the achievement of which is essential for growth and economic stability. As is the case in many advanced economies, the main tool of monetary policy is its effect on the price of money, i.e., the interest rate.
3(b) "The Government, in consultation with the Governor, shall determine the price-stability range."
The range of price stability is defined as the target rate of annual inflation, currently 1–3 percent.
The decision on the short-term interest rate required to meet the inflation target set by the government is the responsibility of the Bank of Israel, the Bank of Israel Law grants the Bank autonomy with regard to that decision.
3(a)(2) "To support other objectives of the Government's economic policy, especially growth, employment and reducing social gaps, provided that, in the Committee's opinion, this support shall not prejudice the attainment of Price Stability over the Course of Time; for this purpose, "Price Stability over the Course of Time" means a situation in which the Committee, on the basis of the monetary policy that it has established, expects the inflation rate to be within the price-stability range determined per Subsection (b) within no more than two years".
The Bank of Israel operates a flexible inflation targeting policy that allows temporary deviations from the target, but is designed to ensure that inflation returns to within the target range within two years at most.
3(a)(3) "To support the stability and orderly activity of the financial System."
The Bank of Israel, similar to most central banks around the world, plays a major role in maintaining the stability of the financial system. A stable financial sector is important per se, and also for the efficient management of monetary policy.
Since the establishment of the Bank of Israel in 1954, it has been responsible for the stability of the banking system. The new Bank of Israel Law gives the Bank the responsibility for supporting the stability of the whole financial system, including the authority to undertake monetary actions vis-à-vis nonbank financial institutions as well. This is appropriate to the current economic reality, particularly following the global financial crisis.
The Bank of Israel Law prescribes the establishment of two bodies in the Bank––a Monetary Committee and a Council––authorized to make decisions on monetary policy and the management of the Bank, and they are obliged to report their decisions to the Knesset, the government and the public.
Decisions on the level of the interest rate and on monetary policy in general will be taken by the Monetary Committee, and administrative decisions, including those on salaries in the Bank, will be approved by the Council. The Monetary Committee and The Council will include members from outside the Bank with the appropriate professional qualifications.
6. "The Governor shall be appointed by the President of the State per recommendation of the Government."
7(a) "The Governor shall manage the Bank and shall also serve as the chairperson of the Committee and member of the Council."
7(b) "The Governor shall serve as advisor to the Government on economic matters, including with regard to reducing social gaps."
The Governor, in his role as economic advisor to the government, participates in the meetings of the Ministerial Committee for Economic Affairs and important government economic discussions.
54. "Within three months of the end of each year, the Governor, in his capacity as advisor to the Government as per Section 7(b), shall present the Government and the Knesset Finance Committee with a report that contains a survey and analysis of the state of the economy and the economic policy in the previous year."
10(a) "The Governor shall be appointed to a five-year term and may be reappointed to one term only."
97(f) "Where no Committee or Council is appointed, the powers vested in this Law in the Committee or the Council, as the case may be, shall be vested in the Governor until the appointment of either as aforesaid"."
8(a) "The Government shall, per recommendation of the Governor, appoint a Deputy Governor."
8(c) "The Deputy Governor shall be a member of the Committee and the Council."
10(b) "The Deputy Governor shall be appointed to a five-year term and may be reappointed to one term only."
The Monetary Committee
15. The Monetary Committee and Its Functions
(1) "Determining policies for the attainment of the Bank’s objectives, including monetary policy;
(2) monitoring the implementation of the policies determined, reviewing from time to time monetary and economic developments and progress toward the attainment of the policy targets, and discussing other matters related thereto;
(3) deciding actions under this Law that the Bank should take for the attainment of its objectives; the Committee’s decision on the interest rate that is set for the purposes of monetary policy (hereinafter: the Interest Rate) shall be for a specified period of time, at the end of which the Committee shall decide whether to change the Interest Rate or leave it in effect for an additional specified period of time."
The Committee will decide the short-term interest rate in the economy and the monetary policy tools that the Bank will use to achieve the inflation target.
(4) "Any other function assigned to it by this Law, including functions relating to the following: acceptance of deposits and grant of credit […] issuing directives concerning the holding of Liquid Assets […] managing Foreign Currency reserves […] and intervening in trading in the Foreign Currency market;"
The Committee, in consultation with the Minister of Finance, will determine the principles to be used for deciding the appropriate long-term level of the foreign exchange reserves and the policy guidelines regarding their investment. The Committee will decide––if such is necessary to achieve the Bank's objectives and targets––on the Bank's intervention in trading in the foreign currency market.
16. "Composition of the Committee
(a) The Committee shall be composed of six members, amongst them the Governor, who shall serve as chairperson, the Deputy Governor, a Bank employee appointed by the Governor, and three additional members from amongst the public;
(b) A member from amongst the public shall be qualified for appointment if he is a resident of Israel, is twenty-five years old or older, and fulfills one of the following:
(1) holds a Doctoral Degree in Economics or Business Administration and has at least five years of experience in the monetary, financial, or macroeconomic field;
(2) holds a Master’s degree in Economics or Business Administration and has at least ten years of experience in the monetary, financial, or macroeconomic field;
(3) is knowledgeable and expert with at least ten years of proven professional experience in the monetary, financial, or macroeconomic field, provided that not more than one member is appointed under the provision of this Subsection;
(c) "Members from amongst the public shall be appointed by the Government, per recommendation of the Candidate Search Committee […] and after consultation with the Appointment Review Committee."
Since on average, according to published research on the subject, decisions made by a group of professionals are better than those made by one, it is expected that on average the procedure for decision making by the Monetary Committee will contribute to good decisions being made.
18(c) "The Committee’s resolutions shall be passed by a majority of its members participating in the voting; in the event of a tied vote, the chairperson shall have an additional vote."
Publication and Reporting
The Monetary Committee is obliged to publish the following reports:
19(a) "The Committee shall publish and report to the Government […] a summary of its deliberations and resolutions, the reasoning behind the resolutions, and the numerical results of voting on the resolutions; said Publishing shall take place at the web site of the Bank or in some other manner the Committee deems fit,"
19(b) "Publishing shall take place within two weeks of the date of deliberations; this notwithstanding, Publishing of the Committee’s resolution regarding the Interest Rate or the use of other monetary tools, as well as a condensed presentation of its reasoning, shall take place on the day of the resolution."
55(a) "No less than twice annually, the Committee shall present the Government and the Knesset Finance Committee with a report containing a survey of developments in the field of price stability and economic developments in the time period covered by the report, and the policy that the Committee believes necessary for the maintenance of price stability within the range determined by the Government […], and for the attainment of the other objectives".
55(b) "If the inflation rate deviates, during six consecutive months, from the range determined by the Government as per Section 3(b), said periodic report shall include details about the reasons for the deviation, the policy that the Committee has adopted to readjust the inflation rate to the determined range, and the Committee’s estimate of the period of time required for the attainment of this result; for this purpose, deviation of the inflation rate” is the change between the Index most recently published before the date of the calculation and the Index published in the same month of the preceding year."
56. "Within three months after the end of each year, the Committee shall present the Government and the Knesset Finance Committee with a report that shall include the principles by which the desired level of Foreign Currency reserves over the long term was determined and the guidelines by which the Bank’s Foreign Currency reserve investment policy for the year ended was determined."
57. "The Government and the Knesset Finance Committee may, at any time, demand that the Bank present them with a report on any matter relating to the activities of the Bank in discharging its functions."
The Council is like the Board of Directors of a firm with regard to supervision of the internal administration of the Bank (as opposed to setting policy).
20(a) "The Bank shall have an Administrative Council whose duties are:
(1) supervising the orderly and efficient management of the Bank;
(2) discussing the Bank’s annual work plan;
(3) approving the annual budget for the Bank’s administrative activity
(4) approving the annual financial statements of the Bank
(5) approving the salary terms of Bank employees and changes thereto, including accompanying terms, and the Bank’s salary structure;
(6) appointing an internal auditor for the Bank, per proposal of the Audit Committee;
(7) discussing and deciding on recommendations of the Audit Committee
(8) appointing a Rectification Team […], the Rectification Team shall be headed by the Governor.
(9) appointing an accountant-auditor for the Bank and terminating his services;
(10) discharging any other function imposed upon it by law".
21. "Composition of the Council
(a) The Council shall consist of seven members: the Governor, the Deputy Governor, and five members from amongst the public.
(b) A Council member from amongst the public shall be a person who fulfills the provisions of Section 16a of the Government Companies Law, mutatis mutandis, […]and is a person of stature in the fields relating to the Council’s work and has experience in senior positions in those fields.
(c) The members from amongst the public shall be appointed by the Government per recommendation of the Candidate Search Committee […]and after consultation with the Appointment Review Committee.
(d) The Government shall determine, in consultation with the Governor, the member of the Council from amongst the public who shall serve as chairperson."
The Council is obliged to publish reports as follows:
20(b) "The Council shall publish the main provisions of the Bank’s annual work plan and its main resolutions, the minutes of its meetings."
20(c) "The Council, within fourteen days of approving the Annual Budget, shall submit it to the Knesset Finance Committee, divided into fields of activity and programs; the Knesset Finance Committee shall hold a discussion on the Annual Budget; soon after the discussion in the Knesset Finance Committee, the Council shall publish the annual budget, divided into fields of activity and programs, in Reshumot."
75(a) "Within three months as of the end of each year, the Bank shall prepare an annual financial report, reflecting the composition and value of the Bank’s assets and liabilities as at the last business day of the year, the outcomes of its operations in said year, and changes in its capital;"
75(b) "Reports as set forth in this Section shall be approved by the Council, shall be submitted to the Government and to the Knesset Finance Committee, and shall be published in such manner as the Council determines."
The Audit Committee
23(a) "The Council shall appoint from its members from amongst the public an Audit Committee; the number of members in said committee shall not be fewer than three; the chairperson of the Council shall not be a member of the Audit Committee."
24. "Duties of the Audit Committee
The Audit Committee shall—
(1) recommend to the Council, after consultation with the Governor, a candidate for the position of Internal Auditor of the Bank;
(2) discuss the annual work plan of the Internal Auditor and recommend to the Council the appropriate budget and personnel standard for its implementation;
(3) identify defects in the administration of the Bank and suggest to the Council ways to rectify them; to exercise said duty, the Committee shall discuss, among other topics, the audit reports of the State Comptroller and of the Internal Auditor of the Bank and the reports of the Accountant-Auditor; it shall also monitor the implementation of the Internal Auditor’s work plan and shall discuss such matters as are brought before it by the Council or by the Governor; said discussion shall take place in consultation with, inter alia, the Internal Auditor or the Accountant-Auditor as the case may be".