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IMF Staff Report on Israel

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Saturday, January 29th, 2011

Israel passed through the global recession swiftly. The challenge now is to sustain growth and low inflation while boosting medium-term prospects—in the context of continued global uncertainty, shekel appreciation, and a housing market that is overheating. Buoyant activity and employment alongside incipient inflation pressures calls for the overall stance of policies to be tightened more quickly than planned. But the onus for the accelerated effort should fall mainly on fiscal rather than monetary policy. This shift in the policy center of gravity will help to contain inflation, reduce upward pressure on the shekel, and support the new fiscal rule. Alongside, monetary policy should focus on inflation and move further towards a neutral stance. In so doing, it should continue to respond to shocks to global demand, and foreign exchange intervention should become more symmetric. Steps to rebalance housing supply and demand can support these efforts. To secure Israel’s medium term prospects, greater coordination between the authorities responsible for the stability of the financial system, and enhanced procedures governing medium-term public spending will be essential.

Read the full report here