Sources: M3 from Bank of Israel; GDP from Statistics Israel as at September 2023

The medium-term relationship between money and nominal GDP growth in Israel, 1965-2022

Five-year moving averages of annual % changes, with 1967 being the start of the first five-year period

Below is a chart covering the period after the hyper-inflationary episode, from 2000 onward.

Comment on monetary trends in Israel

(with thanks to Gabriel Stein)

Israel is one of very few advanced economies to have suffered sustained triple-digit inflation within living memory. Since this would distort any chart, we are additionally showing the period since inflation was tamed. A chart with longer broad money and GDP data follows at the end of this comment. The high inflation era was a result of double- and eventually triple digit broad money growth in the late 1970s and first half of the 1980s, in turn partly a result of consistently large budget deficits. Inflation was tamed in the 1990s and the Bank of Israel eventually followed the path of other advanced central banks, becoming independent in 1985 and starting to target inflation in 1992. Inflation fell below 10% in 1997, below 5% in 1999. The current inflation target is 1-3%, but, in common with developments in many other countries, annual consumer prices fell from April 2020 to January 2021 (and were unchanged from a year earlier in February 2021).

In common with other advanced economies, Israeli policy during the COVID pandemic involved turning on the monetary taps. Broad money growth, which had averaged around 7.5% since 2011, shot up to close to 25% by February 2021. Assuming the relationship between nominal broad money and nominal GDP were to hold true, this would imply inflation eventually reaching close to 20%. That seems unlikely. However, in common with other countries, Israel saw a spurt of growth in 2021/22, almost certainly boosted by the country’s successful vaccination campaign, which – almost uniquely – left it open to (vaccinated) tourists. Hence inflation began to accelerate. Consumer price inflation began to rise from a low of -1.6% in the year to May 2020, reaching 0% in February 2021 and eventually peaking at 5.4% in January 2023, well above the Bank of Israel’s 1%-3% target range. It still stood at 4.1% seven months later. The Bank of Israel started to raise interest rates in April 2022 and ten hikes in the space of less than 16 months have seen the cost of borrowing rise from 0.1% to a 15-year high of 4.75%. The economy has recorded steady growth since early 2021, but a notable easing in broad money growth in 2023 may result in a slowdown in 2024 or 2025.