BOI - Inflation Report 1999, July-December

Summary

1. In the second half of 1999, prices rose by about 3.4 percent, annual terms, and the
economy reverted to a path of price rises similar to that which prevailed from the end
of 1997 till the last quarter of 1998, prior to the international financial crisis. In the
whole of 1999, prices rose at a cumulative rate of 1.3 percent. Although this is
significantly below the 1999 inflation target of 4 percent, it does not indicate that the
inflation invironment has fallen to the level which is the norm in industrialized
countries.
2. For most of the second half of the year, the inflation environment was higher than
the targets set for 1999 and 2000,and it was characterized by high volatility,
converging to the target for the next two years– between 3 and 4 percent-towards the
end of the year.
3. In the course of the second half of 1999, the Bank of Israel gradually reduced the
rate of interest by a total of 0.8 of a percentage point, and its level at the end of the
period was 11.2 percent. The caution exercised in reducing the interest rate is in part
a response to the uncertainty regarding developments in the inflation environment in
the period under review, against the background of fiscal uncertainty and a reduction
of the differential between interest rates in Israel and abroad.
4. Prices in the second half of the year were greatly affected by developments in the
foreign- exchange market, and in particular by changes in the exchange rate. From
July till October the NIS devalued, contributing to price increases, and then it
appreciated, contributing to low rises in the CPI in November- December. The Bank
of Israel did not intervene in foreign- currency trading.
5. The background to price changes was the recovery in economic activity. Various
indices, including domestic product, industrial production, tourist arrivals, and the rise
in the number of immigrants, as well as indications provided by the Survey of
Companies for the last quarter of the year, suggest that a turnaround in real activity
is imminent.
6. The economy's return in the second half of 1999 to an inflation path similar to that
prevailing prior to the world financial crisis, and the inflation target of 3 to 4 percent
per year for the next two years set by the government, provide an opportunity to
consolidate inflation at a level approaching the norm in industrialized countries.
Nevertheless, there are factors present which may still endanger price stability, so
that a cautious monetary policy will be necessary in 2000, too.

Summary
1. Introduction
2. The development of the CPI and the inflation environment
The CPI
Development of the various categories comprising the CPI
The inflation environment
3. Monetary policy and financial assets
Monetary policy
Financial assets
4. The foreign- currency market and exchange- rate developments
Box 1: Israel's Country Risk Rating
5. The development of world prices, and Israel's import and export prices
Box 2: World Oil Prices and Israel's CPI
6. Fiscal policy
7. Real economic developments
8. The background and policy required to consolidate low inflation in Israel
The inflation target
Fiscal policy
Completing the reform of the capital market and the liberalization of the economy
Monetary policy and the development of inflation in the future
Appendix 1:
Deriving Inflation Expectations from the Capital Market
Appendix 2:
Monetary Policy: The Government's Guidelines
Appendix 3:
Press Releases Regarding Monetary Policy Monthly Programs,
July 1999- February 2000