Recent Challenges of Inflation Targeting in Israel Bank of Canada

Transcription

1 Recent Challenges of Inflation Targeting in Israel Bank of Canada Dr. Nadine Baudot-Trajtenberg Deputy Governor of the Bank of Israel September 14 th,, 217 1

2 1/94 4/95 7/96 1/97 1/99 4/ 7/1 1/2 1/4 4/5 7/6 1/7 1/9 4/1 7/11 1/12 1/14 4/15 7/16 After a decade of disinflation process, Israel roughly reaches Price Stability in s and early 8 s: Hyperinflation 1985: Tackling Hyperinflation with both orthodox and unorthodox policies 1994: BoI makes active use of interest rate policy to attain an inflation target (a gradually falling inflation target) 1997: BoI has a de facto fully flexible exchange rate regime 23: Introduction of the present day inflation target of 1%-3% Annual Inflation, and ten year Inflation expectations 1/1994-8/217 2

3 Bank of Israel s Objectives as defined by the Bank of Israel Law of 21 1) Maintain price stability top line inflation target of between 1%-3% within a 24 months period 2) Support economic policy: growth, employment and reducing social gaps 3) Support the stability and orderly activity of financial system 3

4 Israel weathered successfully the GFC GDP annual % change (2-218F) Forecast Developing Economies Israel Advanced Economies SOURCE: IMF

5 Israel has a Strong Labor Market Quarterly, , ages % Participation Rate % Employment rate Unemployment rate Source : Central Bureau of Statistics Labor Force Survey

6 Nominal wages continue to increase % 6 Nominal Wages per Employee Post Seasonally adjusted, moving 3-month average, % change compared with the same period in the previous year, 1/213 5/ מקור : למ"ס ועיבודי בנק ישראל מקור: למ"ס ועיבודי בנק ישראל Total Business sector Public services SOURCE: Central Bureau of Statistics.

7 Israel s G&S Exports* and World Trade** 28=1, F = 1 World Trade Israel Forecast ** What the MPC was seeing in January 217 * (excl. diamonds and start-ups 7 SOURCE: IMF and the Central Bureau of Statistics (Israel)

8 The Appreciation of the Effective Exchange Rate Contributed to Low Inflation and impacted Exports NEER Nominal Effective Exchange Rate, 29-8/ /9 1/1 1/11 1/12 1/13 1/14 1/15 1/16 1/17 8 Source: BoI

9 1/8 5/8 9/8 1/9 5/9 9/9 1/1 5/1 9/1 1/11 5/11 9/11 1/12 5/12 9/12 1/13 5/13 9/13 1/14 5/14 9/14 1/15 5/15 9/15 1/16 5/16 9/16 1/17 5/17 Israel s inflation environment still low compared to trading partners % 8 12-month Inflation in Israel and OECD, OECD (median) Israel -2 Range of ±25% from the median 9 Source: BOI & OECD

10 Inflation of Tradeable and Non-tradeable, , Monthly, 12-month percent change Non Tradeable Tradeable Source: BoI

11 Persistently low inflation % 4 Actual inflation Inflation excluding energy prices, fruits & vegetables, regulated prices Inflation excluding energy prices, fruits & vegetables, regulation -1 Actual inflation Source: BoI, CBS

12 Israeli Consumers Face High Prices, 214 OECD=1 Milk, cheese and eggs Durable goods Other food Non-alcoholic beverages Tobacco Transport Consumer goods Food and non-alcoholic beverages Housing, water, electricity, gas and other fuels Health Recreation and culture Consumer services Individual services Fish Hospital services Education Communication Source: OECD

13 The expansion of personal imports from abroad in recent years as part of a change in consumer behavior Millions if units An increase in the transfer of packages from abroad to Israel Annual, Tons 9, 8, 7, 6, 5, 4, 3, 2, 1, 13 Source: BoI report, 216

14 1/8 5/8 9/8 1/9 5/9 9/9 1/1 5/1 9/1 1/11 5/11 9/11 1/12 5/12 9/12 1/13 5/13 9/13 1/14 5/14 9/14 1/15 5/15 9/15 1/16 5/16 9/16 1/17 5/17 Systematically overestimating inflation 6 5 % One year inflation expectations deviation from actual CPI 1/28 8/ Source: BoI

15 1/8 5/8 9/8 1/9 5/9 9/9 1/1 5/1 9/1 1/11 5/11 9/11 1/12 5/12 9/12 1/13 5/13 9/13 1/14 5/14 9/14 1/15 5/15 9/15 1/16 5/16 9/16 1/17 5/17 Bank of Israel dropped its interest rate til.1% 1/28-8/ month CPI and BoI interest rate 1/28 7/

16 1/7 7/7 1/8 7/8 1/9 7/9 1/1 7/1 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15 1/16 7/16 1/17 Monetary Policy FX Intervention 27-7/217 $12 FX Reserves at the BoI Billions of US $ and X times monthly Imports 13 4,5 FX INTERVENTION $1 Months of imports 11 4, 3,5 $8 9 3, 7 2,5 $6 5 2, $4 $ ,5 1, 5 $ -1 Reserve Building Mkt Intervention Gaz Program 16 Source: BoI

17 Central Bank FX Reserves Index, SOE s index 2=1, Czech Republic New Zealand Israel Korea Sweden Switzerland (Right Axis) 17 Source: IMF

18 Monetary Policy: Forward Guidance Oct 27 th 216 : The Monetary Committee continues to assess that in view of the inflation environment, and of developments in the global economy, in the exchange rate, as well as in monetary policies of major central banks, monetary policy will remain accommodative for a considerable time. April 6 th 217 : The Monetary Committee intends to maintain the accommodative policy as long as necessary in order to entrench the inflation environment within the target range. 18

19 Medium Term expectations returning within the target range and LT Expectations well anchored Inflation Expectations for the medium and long term based on forward prices 3/215 8/ year inflation expectations stand at.79% 3 year inflation expectations in 3 years 'time (inflation forward 3-5 years) stand at 1.42% 5-1 year inflation expectations are stable at about 2% 19 Source: BoI

20 Concluding words 1. Patience does not entail inaction Protracted periods of below target inflation do not entail an automatic loss of monetary policy credibility. Better understand, and better explain, how the transmission mechanism Use more tools and more targeted tools 2. The Israeli experience does not lead to the need of changing the inflation target An important anchor for the economy must not be amenable to easy change unless there is strong evidence that it is no longer at the appropriate level. 3. Monetary policy must take into account financial conditions as signaled by the markets. As upholder of a necessary and crucial nominal anchor it must be able to withstand noise and flavor of the day pressures. Open discussions and clearer explanations 2

21 Thank you 21