Recent Economic Developments, 109


The economy expanded rapidly in the last quarter of 2004, and a particularly large growth was recorded in private consumption. At the beginning of 2005 the expansion in the economy slowed and its composition changed. The share of exports in economic activity declined while the share of domestic consumption and tourism rose. Although unemployment continued to fall, the improvement in employment ceased at the end of 2004. In the area of macroeconomic policy, fiscal discipline was retained, the Bank of Israel made
a further reduction in the interest rate, and the interest rate differential between Israel and abroad contracted to a particularly low level. The consumer price index remained unchanged in the last quarter of 2004, and fell quite heavily during the first quarter of 2005. In that
quarter, inflation expectations rose but remained close to the middle of the inflation target, the expansion in the money supply and the liquidation of the public’s asset portfolio continued, capital imports were extensive, while capital exports were relatively low despite the
decrease in the interest rate differential and the reform in taxation applying to investments abroad.

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