(Communicated by the Bank of Israel)

The Bank of Israel’s monetary policy objectives as outlined in the Bank of Israel Law state that the Bank must attain price stability over time, and subject to that, must support growth, employment and reducing gaps. As a result of the fact that our legislation was only completed in 2010, the law already internalizes the initial lessons from the global crisis. Therefore, support for financial stability is included in the Bank’s objectives.

The policy tools used by the Bank of Israel since then are focused on attaining these objectives. In order to illustrate this, I will briefly review the main trends of the variables and the major markets, and I will then discuss the variety of policy tools we have used in order to attain a variety of objectives.
 
Since the global economic crisis, we can identify three periods, or stages, in the development of the global economy, and of the Israeli economy, during which the Bank of Israel used the various policy tools in various different combinations and permutations.

The first period is the beginning of the crisis, with the collapse of the Lehman Brothers investment bank, the collapse of global trade, and then the rapid exit from the crisis. The second period is the relatively rapid recovery and growth in the global economy and in the Israeli economy, which lasted until mid-2011. The third stage is from mid-2011 until today, moving to a renewed slowdown as a result of the European debt crisis, which is reflected in Israel in a slowdown in growth to a level of about 3 percent per year, or, according to the most recent data, even slightly below that.
 
Inflation, and even more so inflation expectations, reacted to the level of demand as reflected in the various stages since the crisis. At the start of the crisis, with the fall in global trade, we saw a rapid decline in inflation expectations (which even became negative for a short time) and inflation, which at that time exceeded the upper bound of the target range, declined rapidly. With the global recovery, and in Israel as well, inflation again increased, and with the renewed slowdown, it again moderated. All this took place within the bounds of the inflation target range. It is worth noting here that longer-term inflation expectations were always within the bounds of the inflation target range, which testifies to the credibility of the policy of maintaining price stability.

For most of the period, the exchange rate was in a trend of appreciation - first due to the better performance of the Israeli economy compared to other advanced economies, which was reflected in capital inflows, and later when the interest rate in Israel was raised and interest rate gaps opened vis-à-vis the major economies due to our rapid recovery, we saw pressure resulting from short-term movements, and in the first half of 2013 we saw a sharp appreciation due mainly to a decline in geopolitical tensions and the start of natural gas production, which led to an excessive response in the foreign exchange market.

In the housing market, the decline in interest rates and in yields - against the background of low global interest rates - alongside the low inventory of homes and the slow response of supply - were reflected in a continued increase in home prices and an increased volume of mortgages, which led to a prudential risk.
 
These trends were the challenges faced by the Bank of Israel, which made use of the variety of policy tools at its disposal: the Bank of Israel interest rate, which was sharply lowered at the start of the crisis, was raised with the rapid recovery and increase in inflation, and again reduced gradually with the renewed slowdown and decline in inflation. The Bank of Israel purchased foreign exchange in the market, first at fixed amounts in order to increase the level of reserves, and then when sharp fluctuations were not in line with the basic economic forces. Last May, the Bank announced a new foreign exchange purchasing program intended to offset the effects of natural gas production and prevent Dutch Disease, as long as the sovereign wealth fund is not yet operating. And in order to reduce the risks in the mortgage market, the Supervisor of Banks took a series of measures intended to make the new mortgages more safe.
 
The performance of the Israeli economy over the entire period was good relative to those of other advanced economies. Some of this is certainly the result of the good background conditions enjoyed by the Israeli economy prior to the crisis - a current account surplus, a balanced government budget, a declining debt-to-GDP ratio, a conservative and robust banking system, and more. The Bank of Israel’s active monetary policy certainly played a part in creating the conditions for such good performance.
 
In summation, I would like to quote my predecessor as governor, Prof. Stanley Fischer, from remarks he made here exactly one year ago at the annual conference of the Israel Economic Association: “I long for the days before the crisis when we would meet once a month to set the interest rate, and that would be the sum total of our job for the month... I believe that in another few years, and I refuse to use a precise number, we will return to a more normal environment.”
 
In the meantime, as we have seen, we have not yet reached a normal environment, and it does not seem that we are drawing close to one. The dialogue between the central banks and in the international institutions has begun to also deal with the question of “new normal”. And in the meantime, both the international institutions through their recommendations to various countries, and the various central banks, are anchoring their expanded roles in both legislation that defines their objectives and in practice, through the use of a variety of policy tools to attain those objectives, and the Bank of Israel is not absent from this global trend.