Deflation is usually an indicator of falling prices. Policymakers usually scramble to avoid this kind of regression, heaving at the thought of what deflation promises to bring; unemployment, increased value of debt as well as discouraging consumer spending, to name a few. Israel’s deflation, however, tells a different story.
Israel’s deflation stems from government policy. Years of rising prices have pushed policymakers to focus on curtailing price soars. The government have notoriously been mangled in closed market affairs, shunning others from competing within the Israeli domain. Five years ago, pressure from the public was put on government to curtail rapidly rising prices. Recently, the Israeli government have elevated some of the barriers to entry, which has aided the fall in prices.
The increased competition has had a major impact on consumers, increasing choice as well as decreasing prices. As a result, the Israeli economy has flourished. Growth has been clear, rising 4.3%, a 0.3% increase from the previous quarter. By alleviating government intervention, the Bank of Israeli have considerably eased monetary policy.
The central bank has pushed interest rates into very low territory, at 0.1 percent. Unemployment remains low at 4.9%. The labour market is buoyant and in turn, wages are increasing. The primary focus of the Israeli government however, is to protect the Shekel. The currency was vulnerable given the potential for a large interest gap.
Prices are still dropping despite the efforts being made. This indicates that the government will not intervene with an interest rate hike until at least 2017.