Building inflation-targeting credibility

Starting in December 1991, the Bank of Israel began publicly pre-announcing annual inflation targets, making it one of the earliest central banks anywhere, developed or emerging, to adopt inflation targeting as its organizing framework. Rather than attempting an immediate jump to low inflation, the Bank deliberately set early targets at relatively high, double-digit levels, holding them around 8 percent through 1994-1998, to avoid forcing a deep recession simply to prove its resolve. Only once actual inflation had tracked close to these targets for several consecutive years, demonstrating that announcements were not empty promises, did credibility accumulate enough for the Bank to cut the target to 4 percent at the start of 1999 and keep lowering it thereafter. This gradualist sequencing let Israel replace its earlier exchange-rate anchor from the 1985 stabilization with an inflation anchor without a second painful adjustment, and it is this patient build-up of a track record, rather than the mere act of announcing a number, that the Bank itself identifies as the real source of its later low-inflation credibility.