(Adds central bank chief’s comments)
JERUSALEM, July 12 (Reuters) – Bank of Israel Governor Amir Yaron said on Monday that, with structural economic changes such as technological advancements and online shopping pushing prices down, the central bank was studying changes to Israel’s inflation targeting regime.
“There is a need, after almost 30 years of the inflation target regime, and 20 years since it was set at the current range, to re-examine various aspects of the inflation target regime,” Yaron told a conference, adding other central banks were doing the same.
“This process could lead us to the conclusion that the current regime is correct, or that only slight changes to it are necessary.”
Israel’s official annual inflation rate target range stands at 1-3%. The annual rate rose to 1.5% in May from 0.8% in April.
Yaron noted that target was set in early 2000 when the memory of hyper inflation from the 1980s was still fresh and monetary committee members have debated whether policymakers should still strive to meet the target.
“At the time, an inflation targeting regime had served Israel well, Yaron said.
But “no one could have imagined that we would find ourselves with inflation of less than 1% for a number of years,” he said.
“For a large part of the time, when inflation was below the target, the economy showed the strongest growth and lowest unemployment in decades, and the case for an accommodative monetary policy became less clear, particularly in view of the financial risks … it could create.”
In recent years, inflation has been more of a challenge for central bankers from below the target than trying to keep it from rising too fast, Yaron said.
As a result, interest rates have been very low, forcing central banks to use tools other than interest rates to deal with crises. “There is no doubt had we entered the COVID-19 crisis with higher inflation and interest rate environments, our work would have been simpler,” Yaron said.
He added that it is unclear whether monetary policies are still effective to influence inflation given globalisation, a trend to online shopping that has pushed prices down and new technologies to make production and consumption more efficient.
Even before the pandemic, Israel and other governments have introduced policies to lower living costs, while more consumers shopped online.
“It is reasonable to assume that these habits will remain into the future and will create competitive pressure on domestic manufacturers which will tend to push prices down,” Yaron said, noting it’s not easy to distinguish between one-off price adjustments and an inflationary process. (Reporting by Steven Scheer; Editing by Toby Chopra)
