The Bank of Israel is responsible for Maintaining the stability of the money market, foreign currency market. The Bank implements the monetary policy using a verity of monetary tools and monitors ongoing developments in the foreign currency market, analyzes them, and implements the Bank's exchange rate policy.
Tools for Implementing Monetary Policy
The Bank of Israel conducts interest rate policy that is intended to achieve the inflation rate target set by the government. To that end, the Bank uses various monetary tools, including monetary loans to banking corporations, monetary deposits of banking corporations with the Bank of Israel, a credit window and deposit window, makam issues, open market operations, and repos.
Deposit and/or loan auctions for the banks: These constitute the main tools used by the Bank to achieve the interest rate, because of the precision and speed of their effect. The Bank of Israel invites the banks to participate in auctions to borrow money from it for periods of one day or one week, or to deposit money with it for short periods - according to the situation in the money market and the rates of interest set in the auctions. Against loans they take from the Bank, the banks put up collateral, including government bonds and short-term loan certificates (makam, their Hebrew acronym).
The monetary loans and deposits window: The Bank of Israel makes a window for monetary loans (against collateral) available to the banking corporations, the interest on which is a certain amount higher than the Bank's headline interest rate, currently 3.75%, and a window for monetary deposits, on which it pays a rate of interest a certain amount below the Bank's headline interest rate, currently 2.75%.
Central bank bills (makam): These are short-term securities (up to one year) issued by the Bank of Israel to affect the level of the interest rate in the money market. They are issued to the general public, and their rate of return is determined in trading on the stock
exchange and can be used to calculate the public's inflation expectations and expectations of changes in monetary policy.
Repo: A repurchase agreement (repo) is a transaction in which the Bank of Israel sells, possibly by auction, government bonds and makam to banks and financial institutions, and buys them back after one week at a pre-set price. In a reverse repo, the Bank of Israel
purchases the government bonds and makam from the banks and financial institutions, and sells them back after one week at a pre-set price. In the case of the reverse repo, the amount paid by the Bank of Israel for those securities serves to increase liquidity in the economy. The difference between the price at which the Bank of Israel buys the securities and the price at which it sells them back represents the interest. Repos are one of the important tools used by central banks in many advanced economies to conduct monetary policy
Open market operations: Another tool used by the Bank of Israel to provide liquidity is the purchase and sale in the secondary market of various types of government bonds for various terms.