preface

12
THE ISRAELI ECONOMY IN 2010
1.2.6. Monetary Development and Capital Markets
The Consumer Price Index (CPI) rose by 2.7% in 2010, compared with
a 3.9% rise in 2009 and a 3.8% rise in 2008. In 2010, the government's
annual inflation target of 1%-3% was accomplished. The main
contributors to the CPI increase in 2010 were the prices of housing,
transportation, communications, and fruit and vegetables.
Although many of the advanced economies are growing slowly despite
their expansionary fiscal and monetary policy, Israel achieved a high
rate of growth in the economic and employment sectors during the
second half of 2009 and in the first half of 2010.
Israel, like most other countries, implemented a very expansionary
monetary policy in late 2008 and early 2009, hoping to recover from the
downside effects of the global economic crisis. Unlike many of the
leading economies, the Israeli economy responded quickly to the
expansionary policies. At the end of the second quarter of 2010, Israel
achieved the pre-crisis levels of economic activity and employment. The
major challenges for policymakers were determining the interest rate
adjustment pace and deciding what other policy tools should be
implemented, particularly regarding the foreign exchange market
interventions and supervisions.
Inflation forecasts for the upcoming twelve months indicate a
continuing rise in the CPI within the target range. The major contributor
to the anticipated CPI increase is the housing index. This index rose by
6% between January and September 2010 and is expected to rise by 8%
during the next 4 quarters. Conversely, other components of the index
are expected to grow continuously at a lower rate of approximately 1%.
Addressing the monetary policy, the Bank of Israel moderated the
monetary expansion as of the third quarter, bearing in mind the
increased inflation, expansion in economic activity and the rapid rise of
housing prices. In December 2010, the Bank of Israel set the interest
rate at 2%.
BDO Israel