% annual growth rate:

Sources: M3 from Bank of Israel; GDP from Statistics Israel

The medium-term relationship between money and nominal GDP growth in Israel, 2000-2020

Five-year moving averages of annual % changes, with 2000 being the start of the first five-year period

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 only 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 is likely to see a spurt of growth in 2021/22, almost certainly boosted by the country’s successful vaccination campaign, which – almost uniquely – will leave it open to (vaccinated) tourists. Hence inflation here is also likely to accelerate. Consumer price inflation has risen from -0.7% in the year to December 2020, to 0 in February 2021, and could well rise above the Bank of Israel’s 1-3% target range by the end of the year.