Recent Challenges of Inflation Targeting in Israel Bank of Canada Dr. Nadine Baudot-Trajtenberg Deputy Governor of the Bank of Israel September 14th,, 2017 1 After a decade of disinflation process, Israel roughly reaches Price Stability in 2003 15 Annual Inflation, and ten year Inflation • 1970’s and early 80’s: Hyperinflation expectations – 1/1994-8/2017 13 • 1985: Tackling Hyperinflation with both orthodox and unorthodox 11 policies 9 • 1994: BoI makes active use of interest 7 rate policy to attain an inflation target (a gradually falling inflation target) 5 • 1997: BoI has a de facto fully flexible 3 exchange rate regime 1 • 2003: Introduction of the present -1 day inflation target of 1%-3% -3 01/94 04/95 07/96 10/97 01/99 04/00 07/01 10/02 01/04 04/05 07/06 10/07 01/09 04/10 07/11 10/12 01/14 04/15 07/16 2 Bank of Israel’s Objectives as defined by the Bank of Israel Law of 2010 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 Israel weathered successfully the GFC GDP annual % change (2000-2018F) Forecast 10 8 6 Developing Economies 4 Israel 2 Advanced Economies 0 -2 -4 4 SOURCE: IMF Israel has a Strong Labor Market Quarterly, 1995-2017, ages 25-64 % % 82 12.5 Participation Rate 79.9 80 11.5 76.8 78 10.5 76 9.5 Employment rate 74 8.5 72 7.5 6.5 70 5.5 68 4.5 3.9 66 Unemployment rate 3.5 64 5 Source : Central Bureau of Statistics Labor Force Survey Nominal wages continue to increase Nominal Wages per Employee Post % Seasonally adjusted, moving 3-month average, % change compared with the same period in the previous year, 1/2013 – 5/2017 6 5 4.3 4 3.9 3.3 מקור: למ"ס ועיבודי בנק ישראל מקור: למ"ס ועיבודי בנק ישראל 3 2 1 0 Total Business sector Public services SOURCE: Central Bureau of Statistics. Israel’s G&S Exports* and World Trade** 2008=100, 1995-2017F Forecast 130 World Trade 120 110 Israel 100 2008 90 80 70 = 60 100 50 40 30 20 10 0 ** What the MPC was seeing in January 2017 * (excl. diamonds and start-ups 7 SOURCE: IMF and the Central Bureau of Statistics (Israel) The Appreciation of the Effective Exchange Rate Contributed to Low Inflation and impacted Exports Nominal Effective Exchange Rate, NEER 2009-8/2017 110 105 100 95 90 85 80 75 70 01/09 01/10 01/11 01/12 01/13 01/14 01/15 01/16 01/17 8 Source: BoI Israel’s inflation environment still low compared to trading partners % 8 12-month Inflation in Israel and OECD, 2008-2017 6 4 OECD (median) 2 Israel 0 Range of ±25% -2 from the median 01/11 01/17 01/10 05/11 09/11 01/12 01/13 01/15 01/16 01/14 05/17 01/08 01/09 05/10 09/10 05/12 09/12 05/13 09/13 05/15 09/15 05/16 09/16 05/14 09/14 05/08 09/08 05/09 09/09 9 Source: BOI & OECD Inflation of Tradeable and Non-tradeable, 2006-2017, Monthly, 12-month percent change 8.5 7.5 6.5 5.5 Non 4.5 Tradeable 3.5 2.5 1.5 0.5 -0.5 -1.5 Tradeable -2.5 -3.5 -4.5 10 Source: BoI Persistently low inflation – 2013-1017 Actual inflation % Inflation excluding energy prices, fruits & vegetables , regulated prices 4 2013-2017 3 2 Inflation excluding energy prices, fruits 1 & vegetables , regulation 0 -1 Actual inflation -2 11 Source: BoI, CBS Israeli Consumers Face High Prices, 2014 OECD=100 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 0 20 40 60 80 100 120 140 160 180 12 Source: OECD The expansion of personal imports from abroad in recent years as part of a change in consumer behavior An increase in the transfer of packages from abroad to Israel Millions if units Annual, 2006-2016 Tons 60 9,000 8,000 50 7,000 40 6,000 5,000 30 4,000 20 3,000 2,000 10 1,000 0 0 13 Source: BoI report, 2016 14 - - - - 6 0 1 2 3 4 5 4 3 2 1 Source: Source: % 01/08 05/08 BoI 09/08 Systematically overestimating inflation overestimating Systematically One year inflation expectations deviation from actual CPI actual from deviation expectations inflation year One 01/09 05/09 09/09 01/10 05/10 09/10 01/11 05/11 01 / 09/11 2008 01/12 05/12 – 09/12 08 01/13 / 2017 05/13 09/13 01/14 05/14 09/14 01/15 05/15 09/15 01/16 05/16 09/16 01/17 05/17 Bank of Israel dropped its interest rate til 0.1% 01/2008-8/2017 12 month CPI and BoI interest rate 6 01/2008 – 07/2017 5 4 3 2 1 0 -1 -2 09/10 05/14 01/08 05/08 09/08 01/09 05/09 09/09 01/10 05/10 01/11 05/11 09/11 01/12 05/12 09/12 01/13 05/13 09/13 01/14 09/14 01/15 05/15 09/15 01/16 05/16 09/16 01/17 05/17 15 Monetary Policy – FX Intervention 2007-07/2017 FX Reserves at the BoI FX INTERVENTION Billions of US $ and X times monthly Imports 4,500 $120 13 Months of imports 4,000 11 $100 3,500 9 $80 3,000 7 2,500 $60 2,000 5 $40 1,500 3 1,000 $20 1 500 $0 -1 0 01/10 01/07 07/07 01/08 07/08 01/09 07/09 07/10 01/11 07/11 01/12 07/12 01/13 07/13 01/14 07/14 01/15 07/15 01/16 07/16 01/17 Reserve Building Mkt Intervention GazProgram 16 Source: BoI Central Bank FX Reserves Index, SOE’s index 2000=100, 2000-2017 1290 2500 1090 2000 890 1500 690 1000 490 500 290 90 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Czech Republic New Zealand Israel Korea Sweden Switzerland (Right Axis) 17 Source: IMF Monetary Policy: Forward Guidance • Oct 27th 2016 : “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 6th 2017 : ”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 Medium Term expectations returning within the target range and LT Expectations well anchored Inflation Expectations for the medium and • 1-3 year inflation expectations 4.00 long term based on forward prices stand at 0.79% 03/2015 – 08/2017 • 3 year inflation 3.00 expectations in 3 years 'time (inflation 2.00 forward 3-5 years) stand at 1.42% 1.00 • 5-10 year inflation 1-3 3-5 5-10 expectations are 0.00 stable at about 2% 19 Source: BoI 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 20 Thank you 21.