The Bank of Israel's Monetary program for August 1999

July 25,1999

Monetary program for August 1999

The Bank of Israel announced its monetary program for August 1999, according to which the interest rate is reduced by 0.5 of a percentage point.

The Bank of Israel explained that the decision was made possible by progress in reducing inflation, expressed in a reduction of inflation expectations twelve months forward and beyond-as measured by various forecasters and the capital market-to an environment slightly above 4 percent. The progress in lowering inflation was also expressed in the very low rises in price indices at the beginning of the year, which reflect a partial correction for the very rapid rises in the indices towards the end of 1998. The Bank clarified, however, that great caution must be exercised in adjusting the interest rate, particularly in the light of the high sensitivity of international financial markets. Against this background, when an opportunity to lower the interest rate arises, the reduction must be by a responsible and appropriate amount. The Bank of Israel also noted that the money supply increased relatively fast in 1998. To ensure that the achievement in reducing inflation and maintaining stability is consolidated, it is vital that the rate of increase of the money supply be consistent with the attainment of the inflation targets.

The Bank repeated that the main challenge of monetary policy continues to be to bolster economic stability-a sine qua non for sustainable growth. What is required, therefore-at this time in particular, in the light of the expected deviation from the target budget deficit for the current year-is a responsible budget policy which will incorporate taking the earliest possible measures to ensure a return to the deficit path decided on by the government. At the same time, it is vital that the composition of government expenditure should give priority to investment in the physical infrastructure, in human capital, and in R&D. A comprehensive and determined policy of structural reforms should be pursued, including such that will reduce the tax burden without causing a deviation from the target deficit, and continue the policy aimed at bolstering economic stability.