Chapter 3- ​Monetary Policy and Inflation


Chapter 3
·         Inflation declined in 2014, reaching -0.2 percent, below the price stability target range (1–3 percent). The decline was mainly the result of the appreciation of the shekel prior to July, the drop in global oil prices in the second half of the year, and domestic supply factors such as increased competition, mainly in the communications market.
·         One-year inflation expectations ranged in the lower portion of the target range for most of the year, and declined to below the range toward the end of the year. Expectations for longer terms ranged around the midpoint of the target range.
·         Monetary policy acted to support activity and exports, and to return inflation to the target range, as the global economy—excluding the US—continued its slow growth, various indicators in the first half of the year caused concern that domestic demand had declined, and the shekel continued to appreciate. In view of the low interest rate environment, the Monetary Committee examined unconventional policy tools, some of which have already been implemented in a number of countries.
·         The exchange rate developed unevenly during the year. The shekel continued to strengthen through July; the Bank of Israel continued to purchase foreign exchange until June as part of a program intended to moderate fluctuations in the exchange rate that are not in line with economic fundamentals, and in order to support activity in the tradable sector. From August to November, there was a significant depreciation of the shekel, after the Bank of Israel further lowered the interest rate and the dollar strengthened globally. The shekel’s appreciation resumed in December. Throughout the year, the Bank of Israel continued to purchase foreign exchange based on the purchasing program intended to offset the effects of natural gas production on the current account and, through it, on the exchange rate.
·         The Monetary Committee maintained the policy it adopted in late 2011, and lowered the interest rate—from 1 percent at the beginning of the year to 0.25 percent for September. In February 2015, the Monetary Committee reduced the rate for March to a historic low of 0.1 percent, because inflation and inflation expectations were below the target, and because the shekel’s appreciation resumed at the end of 2014. The policy decisions reflected the thinking that the interest rate tool is intended to support activity in the economy and price stability, while macroprudential tools work to reduce the risks to financial stability from developments in the housing market.
·         The housing market was characterized for most of the year by a large extent of uncertainty due to the wait for the “Zero VAT for first-time home buyers” bill, and activity in the market moderated. The fourth quarter of the year saw renewed demand and price increases, which intensified in December as elections were brought forward and legislation of the Zero VAT bill was frozen. Since housing credit continued to expand, in September the Supervisor of Banks increased the capital buffers that banks are required to allocate against it in order to increase the banks’ capacity to absorb losses in the event the risks to borrowers’ repayment capabilities for these loans are realized.
Monetary Policy and Inflation                 PDF file