Bank of Israel Annual Report - 2010

Chapter 1: The Economy and Economic Policies

• During 2010, the economy enjoyed a continuation of the growth which began in the second quarter of 2009 and which can be attributed to the increase in global and local demand.
• GDP grew by 4.6 percent and was accompanied by a continuous increase in employment. The participation rate reached a record high and the rate of unemployment fell to a level of 6.6 percent at the end of the year.
• The global economy continued to recover in 2010, with higher growth rates recorded in the developing economies and slower rates of recovery in the developed economies.
• The expansionary monetary policy contributed to the increase in economic activity this year. It did so by means of the low level of the interest rate and the purchase of foreign currency which moderated the extent of the appreciation of the shekel, thereby helping exports.
• The rate of inflation was 2.7 percent in 2010, within the target inflation range. This development reflected relatively sharp increases in the housing component and energy prices and a significant increase in the prices of fruits and vegetables.
• The prices of real and financial assets grew at a relatively rapid rate in 2010 against the background of a rate of interest that is below its long-term level.
• House prices this year continued to increase rapidly, at a rate of 1 6 percent, and their level relative to wages was higher than in the past. Share prices rose by 1 3 percent, accompanied by a narrowing of spreads in the corporate bond market.
• The resilience of financial institutions improved and they enjoyed a high level of profitability. This contributed to the continued improvement in their capital structure and financial stability.
• The Bank of Israel responded to macroeconomic developments by raising the interest rate by 0.25 percentage points four times in 2010 to a level of 2 percent by the end of the year. This was accompanied by a number of policy measures that were intended to reduce the risks to financial stability, and to moderate the increase in house prices.
• The increase in the interest rate spread between Israel and the large developed countries contributed to a rise in the inflow of short-term capital and an appreciation in the exchange rate. In order to moderate the appreciation, the Bank of Israel purchased foreign currency during the course of the year and at the beginning of 2011 took additional steps to contend with the inflow of short-term capital. The nominal effective exchange rate appreciated by 7.1 percent during 2010.
• Public consumption grew this year by a relatively high rate of 5.9 percent in nominal terms, although the general government deficit fell to 3.8 percent of GDP due to the larger-thanforecasted increase in tax revenues. The debt-to-GDP ratio fell to 76.2 percent, which is lower than its pre-crisis level.
• Another major development in the Israeli economy during the past two years has been the discovery of large natural gas reserves within Israel’s maritime borders. These reserves are expected to provide a significant portion of the economy’s energy needs for many years, starting from the second half of the current decade.