Jerusalem, 1 February 2000

Bank of Israel Submits 1999 Inflation Report

(Communicated by Bank of Israel Spokesman)

Bank of Israel Governor David Klein today (Tuesday) 1.2.2000, submitted to the government, Knesset and public, the inflation report for the second half of 1999, prepared by the Bank’s monetary forum.

Prices rose by 3.4% in annual terms in the second half of 1999, and the economy reverted to the price increases similar to those between the end of 1997 and August 1998, before the global financial crises. Due to the steps the Bank took as a result of the crises in order to prevent breaching the government’s 1999 inflation target of 4%, inflation in the first half of 1999 was 1.3%. This rate did not reflect the long-range inflationary environment, beyond any particular calendar year. The inflationary environment in the second half of 1999 was generally higher than the 3-4% annual inflation target for the years 2000-1. The expected rate of inflation is now expected to be about 3% — closer than in the past to the level defined as "price stability", i.e. the level of inflation in developed countries.

The challenge now facing monetary policy is to consolidate the processes to achieve the government’s inflation target for the next two years against the inflationary risks in the financial area. This requires gradual and sustained policies and decision-making for the economy, including: Maintaining the multi-year inflation targets over the next two years; amending the Bank of Israel Law in accordance with the recommendations of the Levin Commission report; completing the liberalization of the foreign currency market; reducing the weight of the CPI-linked government debt; setting taxation regulations and tax reform so as not to include linkage; ending linkage-based prices, contracts and wage agreements; setting accountancy rules appropriate to a low inflationary environment; and increasing the weight of unlinked stocks and Shekel assets – especially long-term – in the public’s asset portfolios.

Inflationary risks include the rising trend in global interest rates, rapid and unexpected changes in international financial markets and rapid changes in public asset portfolios arising from rapid fluctuations in exchange rates.