The inflation report for the first half of 1998

29 July, 1998

The inflation report for the first half of 1998

The Governor of the Bank of Israel, Professor Jacob A. Frenkel, today submitted to the government and the public the Inflation Report for the first half of 1998, which was prepared at the Bank of Israel by the Monetary Forum, which he heads. This is the senior inter-departmental team (drawn from the Monetary, Research, Foreign Currency, and Foreign Exchange Control Departments) that is responsible for making monetary policy decisions.

In the first half of 1998-the period to which the report refers-there was marked progress regarding inflation, which fell to an annual rate of 4-5 percent. This brings Israel nearer to the long-term objective set by the government-the ong-term price- stability customary in industrial countries. Note that alongside monetary policy, the favorable background conditions currently prevailing, including the development of >SPAN CLASS=regText>world prices, make it possible to advance more quickly and without further monetary restraint towards the goal of price stability in Israel. The latter is essential, as it constitutes an important basis for advancing towards the attainment of Israel’s growth potential in order to achieve sustainable growth.

Economic crises due mainly to negative developments on the financial markets have recently affected many countries, particularly those in East Asia. These crises have indicated the importance of implementing fiscal and monetary policy that is based on long-term goals that aim for economic stability. This is all the more so in view of the significant progress that has been made in the liberalization of foreign exchange, as part of the Israel economy’s successful integration in the global economy. Both the fiscal and monetary aspects of Israel’s macroeconomic policy have played an important part in preventing these crises from affecting Israel. The experience of Israel and the world indicates the importance of continued adherence to a policy that focuses on economic stability.

Interest-rate policy will continue to be consistent with the continued gradual reduction of the inflation rate, the object being to attain the price stability over time that is customary in advanced economies, as the government has determined. Adhering to the fiscal path, setting a quantitative track for inflation targets that converge towards price stability, and determining exchange-rate policy parameters that accord with the inflation target will make it possible to continue approaching western inflation rates. By progressing in this sphere it will be possible to bring Israel’s nominal and real interest rates into line with those accepted in the advanced economies.

This is the second Inflation Report that is submitted as part of the periodical monitoring of the course of inflation and adherence to the inflation target set by the government, as is customary in central banks elsewhere. The object of the report is to increase the transparency-and hence the credibility-of monetary policy. The greater transparency of economic policy is crucial in view of the growing interest displayed in Israel’s economic potential in the last few years, as reflected by Israel’s improved financial standing and the inflow of investment by nonresidents.