Objectives And Functions
The main objectives of the Bank are listed and prioritized in the Law: To maintain price stability; to support other objectives of the Government's economic policy, especially growth, employment, and reducing social gaps; and supporting the stability of the financial system.
3(a)(1) "To maintain price stability as its central goal."
The main function of the Bank of Israel is to maintain price stability, i.e., to preserve the currency's purchasing power. Monetary policy is primarily directed towards attaining this objective, the achievement of which is essential for growth and economic stability. As is the case in many advanced economies, the main tool of monetary policy is its effect on the price of money, i.e., the interest rate.
3(b) "The Government, in consultation with the Governor, shall determine the price-stability range."
The range of price stability is defined as the target rate of annual inflation, currently 1–3 percent.
The decision on the short-term interest rate required to meet the inflation target set by the government is the responsibility of the Bank of Israel, the Bank of Israel Law grants the Bank autonomy with regard to that decision.
3(a)(2) "To support other objectives of the Government's economic policy, especially growth, employment and reducing social gaps, provided that, in the Committee's opinion, this support shall not prejudice the attainment of Price Stability over the Course of Time; for this purpose, "Price Stability over the Course of Time" means a situation in which the Committee, on the basis of the monetary policy that it has established, expects the inflation rate to be within the price-stability range determined per Subsection (b) within no more than two years".
The Bank of Israel operates a flexible inflation targeting policy that allows temporary deviations from the target, but is designed to ensure that inflation returns to within the target range within two years at most.
3(a)(3) "To support the stability and orderly activity of the financial system."
The Bank of Israel, similar to most central banks around the world, plays a major role in maintaining the stability of the financial system. A stable financial sector is important per se, and also for the efficient management of monetary policy.
Since the establishment of the Bank of Israel in 1954, it has been responsible for the stability of the banking system. The new Bank of Israel Law gives the Bank the responsibility for supporting the stability of the whole financial system, including the authority to undertake monetary actions vis-à-vis nonbank financial institutions as well. This is appropriate to the current economic reality, particularly following the global financial crisis.