Monetary Policy Report 2017 - first half

28/08/2017
All Publications In Subject:
Monetary Policy and Inflation
Summary of recent economic developments
·        Monetary policy: During the first half of 2017, the Monetary Committee left the interest rate unchanged and in April it updated its forward guidance policy, from a formulation presenting the assessment that monetary policy would remain accommodative for a considerable time to a statement of the Committee’s intention to maintain the accommodative policy as long as necessary in order to entrench the inflation environment within the target range. During the reviewed period (January to June), in view of pressures for appreciation of the shekel, the Bank of Israel increased its foreign exchange purchases, which totaled about $5.9 billion.
·        Actual inflation and inflation expectations: The annual rate of inflation was positive from January 2017, for the first time since 2014, though it is still below the lower bound of the inflation target range. However, with the publication of the CPI reading for June, the rate fell to -0.2 percent. One-year inflation expectations and one year, one-year forward expectations (that is, second year forward expectations) remained below the lower bound of the inflation target range, while medium and long-term (more than three years) inflation expectations remained solidly within the target range.
·        Real domestic activity: During the first half of 2017, the Committee discussed the strength of real economic activity, which is reflected in the resilience of the labor market, the growth figures for the second half of 2016 and the first quarter of 2017 and also the indicators of activity in the second quarter. The figures available to the members of the Committee at the beginning of the year showed that private consumption and investment were continuing to lead growth. At a later stage, they showed that consumption had moderated but that the growth rate of exports had increased.
·        The exchange rate: During the reviewed period, the shekel appreciated by 4.8 percent in terms of the nominal effective exchange rate (the average for June relative to the average for December), primarily as a result of the weakening of the dollar worldwide. Most of the appreciation occurred at the beginning of the period and it was halted against the background of the large-scale intervention by the Bank of Israel in the foreign exchange market. In July, the shekel depreciated by 3.0 percent in terms of the effective exchange rate.  The shekel appreciated by 7.7 percent against the dollar and by 1.8 percent against the euro until June, but depreciated by 1.8 percent against the dollar and by 4.5 percent against the euro in July.
·        The global economy: World trade improved during the period, as did the growth figures of most economies. The Federal Reserve raised the federal funds rate—a trend that is expected to continue—and in Europe the highly accommodative monetary policy continued. Core inflation in the US was near the target while that of the eurozone was still relatively low.
·        The housing market: The figures for the reviewed period indicate that home prices have stabilized in recent months, alongside more moderate demand and the continuing steady growth in supply.
·        The financial markets: The domestic share indices rose during the reviewed period. However, some of the indices underperformed the leading indices in Europe, the emerging markets and the US. This is primarily due to the underperformance of the large companies, particularly those in the chemical and pharmaceutical industries. The nominal yield curves shifted downward in the medium and long terms. The spreads between corporate bonds and government bonds for similar duration and indexation declined during the reviewed period, to their lowest level since 2007.
·        Fiscal developments: The cumulative domestic deficit (excluding net credit provided) totaled NIS 9 billion for January–June, compared with NIS 3.1 billion for the same period last year. The overall deficit for the last 12 months totaled 2.5 percent of GDP, compared with 2.1 percent of GDP at the end of 2016. During the reviewed period, the government decided on several measures to reduce tax rates and expand government expenditure during the years 2017 and 2018, while focusing on families with children up to the age of 6.
·        Research Department staff forecasts: According to the latest forecast by the Research Department, made in June 2017, GDP is expected to grow by 3.4 percent in 2017 and by 3.3 percent in 2018. Inflation is expected to converge to within the target range during 2018 and the Bank of Israel interest rate is expected to remain at its current level until the second quarter of 2018. Compared with the forecast made in December, the timing of the interest rate increase has been delayed and the forecast inflation is lower.
          
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