The Monetary Committee decides on October 3, 2022 to increase the interest rate by 0.75 percentage points to 2.75

 

  • ​  Inflation in Israel is above the upper bound of the target range, at 4.6 percent over the past 12 months. Inflation is being recorded in a wide range of CPI components. 
  •  One-year inflation expectations are around the upper bound of the target range.  Expectations from the capital market for the second year and onward are within the target range.
  •   Since the previous monetary policy decision, the shekel was particularly weak, dropping by 8 percent against the US dollar, by 6.2 percent against the euro, and by 5.9 percent in terms of the nominal effective exchange rate.
  •   Economic activity in Israel remains strong.  The labor market remains tight and is in a full employment environment.  Indicators of economic activity also continue to point to increased activity and GDP that is higher than the trend that was forecast prior to the COVID-19 crisis.
  •   The Research Department revised its forecast.  Its assessment is that GDP will grow by 6 percent in 2022, and by 3 percent in 2023.  The inflation rate is expected to be 4.6 percent in 2022, and to decline to 2.5 percent in 2023.
  •  Home prices increased by 17.9 percent in the past 12 months, significantly higher than the pace of recent years.  The pace of the monthly increase in rental prices intensified, with prices increasing by 0.8 percent in August.
  •   The energy crisis in Europe and the continuing war in Ukraine, the high inflation and monetary tightening, and the slowdown in China are all leading to moderation in economic activity around the world.

 

The Israeli economy is recording strong economic activity, accompanied by a tight labor market and an increase in the inflation environment. The Committee has therefore decided to continue the process of increasing the interest rate.  The pace of raising the interest rate will be determined in accordance with activity data and the development of inflation, in order to continue supporting the attainment of the policy goals.

 

 

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Economic activity in Israel remains strong, and according to National Accounts data GDP has been above the trend line for the past three quarters. The labor market remains tight and in a full employment environment.  However, the moderation of global activity is expected to lead to some slowdown in economic activity. Inflation in Israel is above the target range, and is being recorded in a wide range of CPI components.  However, it is within the lowest decile among the OECD countries (Figure 30).

Since the previous interest rate decision, the CPI declined by 0.3 percent in August. Inflation in the past 12 months is above the upper bound of the target range, at 4.6 percent (Figure 1).  With that, inflation in Israel remains significantly lower than in most of the advanced economies (Figure 30).  Net of energy and fruits and vegetables, inflation is 4.7 percent, unchanged from the previous month, and with the further neutralization of the effects of taxation and regulation, it is 4.4 percent (Figure 2).  The pace of inflation of the nontradable components increased—partly in view of the increase in the housing services component—to 4.4 percent. In contrast, the annual pace of inflation of the tradable components moderated, to 5.1 percent, mainly due to the effect of declines in the price of oil and in the tax on fuel (Figure 3).  In the Committee’s assessment, the monetary tightening processes in Israel and abroad, alongside the easing of the supply chain difficulties and declines in the prices of oil and other commodities will act to moderate inflation.

One-year inflation expectations are around the upper bound of the target range (Figure 5). Expectations for the second year and onward from the capital market are within the target range (Figure 6).  Since the previous monetary policy decision, the shekel was particularly weak, falling by 8 percent against the US dollar, 6.2 percent against the euro, and by 5.9 percent in terms of the nominal effective exchange rate (Figure 7).

Economic activity is strong.  The indicators of economic activity continue to point to increased activity and a GDP level that is higher than the trend line that was forecast prior to the COVID-19 crisis.  The aggregate balance of the Central Bureau of Statistics Business Tendency Survey for August continues to reflect businesses’ positive assessments of their situation (Figure 17).   Due to the easing of pressure in the global supply chains, companies in the manufacturing and construction industries reported a continuing significant decline in the equipment and raw materials constraint. However, the level of the constraint remains higher than it was prior to the COVID-19 crisis.  The tourism industry is also continuing its recovery, with the number of overnight hotel stays now close to its precrisis level, despite the relatively low level of incoming tourism.  Goods exports (excluding ships, aircraft, and diamonds) remain higher than before the pandemic, and services exports remain very high (Figure 18).  Goods imports are also high in all components (Figure 19).

 

The labor market remains tight.  The unemployment rate for those aged 15+ was 3.4 percent (seasonally adjusted), and the employment rate (61.5 percent) increased slightly, and is now higher than its average level in 2019.  The employment rate among the prime working ages (25–64) reached a record high (Figure 22).  In parallel, the demand for workers remains high. The number of job vacancies and the job vacancy rate are very high, despite the continued moderate decline in August. According to the Central Bureau of Statistics Business Tendency Survey, there was some decline in businesses’ expectations of expanding their employee numbers, but those expectations remain higher than they were prior to the crisis. Nominal wages are increasing, and are above their precrisis trend, but there is some wage erosion in real terms, with real wages now around the trend that was forecast based on the precrisis trend (Figure 25).

The Bank of Israel Research Department revised its macroeconomic forecast.  In its assessment, GDP will grow by 6 percent in 2022, and by 3 percent in 2023, such that GDP at the end of 2023 is expected to be higher than what was estimated in the previous forecast (Figure 13).  The level of economic activity derived from the forecast remains strong.  The unemployment rate among the prime working ages (25–64) is expected to average 3.5 percent in 2023.  The inflation rate is expected to be 4.6 percent in 2022 and to return to around the midpoint of the target range, falling to 2.5 percent in 2023.  In addition, the debt to GDP ratio is expected to be lower than the assessment in the previous forecast, at 65 percent in 2022, and 63 percent in 2023.

Home prices increased by 17.9 percent in the past 12 months (Figure 10), a significantly higher pace than in previous years.  However, the numbers of building permits and of building starts increased, and are very high.  In contrast, building completions have remained low thus far, in view of the extended duration of construction.  The number of housing transactions continues to decline. The volume of new mortgages taken out in August declined to NIS 9.6 billion, but it remains higher than in previous years (Figure 12). The monthly pace of rent price increases climbed to 0.8 percent in August.

In the domestic capital market there were declines in the equity indices, yields on long-term government bonds increased, and corporate bond spreads widened, similar to the worldwide trend (Figure 11). According to the Central Bureau of Statistics Business Tendency Survey, financing constraints among businesses of various sizes remained relatively low in all sectors (Figure 17).

Global economic activity continues to moderate, as a result of the combination of the energy crisis in Europe, high inflation and monetary tightening, the continuing war in Ukraine, and the slowdown in China.  Supply chain difficulties also continue to weigh down on economic activity, although these have eased, including a decline in shipping costs.  The OECD and investment houses revised their global growth forecasts for 2023 downward (Figure 26).  The global purchasing managers’ index of advanced economies declined in August, and indicates a continued slowdown in the pace of economic activity, while the index for the emerging markets declined, but continues to indicate expansion (Figure 27). The volume of activity in world trade recovered slightly in recent months, but the export orders component of the index, which is a leading indicator of the volume of trade in coming months, is at contraction level.

There were sharp price declines in the main global equity markets, with high volatility (Figure 34). In parallel, there was a significant increase in government bond yields, in view of the continued interest rate increases and hawkish forward guidance of the main central banks. Likewise, corporate bond spreads widened, and indicate an increase in the risk of failure due to changes in the economic environment. Oil and other commodity prices declined in view of expectations of a continued slowdown in global economic activity (Figure 32). 

The global inflation environment continued to increase.  In most countries, the inflation indices are significantly higher than the central bank targets (Figure 31), and monetary tightening around the world therefore continues.  In the US, growth forecasts for the coming months point to moderate growth.  While the annual increase in the CPI declined to 8.3 percent in August, it was significantly higher than previously forecast.  The Federal Reserve has significantly revised its interest rate forecast for the coming years, while lowering its growth forecast.  It also increased the volume of its government bond sales. In the eurozone, despite the relatively high growth data in the second quarter, annual forecasts were revised downward in view of the effects of the energy crisis and the increasing monetary tightening.  In parallel the increase in inflation continues, and the overall index is at 10.0 percent.  The ECB accelerated its monetary tightening, and increased its interest rate by 75 basis points—the largest increase the ECB has ever made.  In the UK, the Bank of England’s monetary contraction policy continues, and the new government announced expansionary fiscal measures upon taking office, which led to a significant increase in government bond yields, and Bank of England intervention due to financial stability concerns.  In a number of other countries where inflation is above the central bank target, there were increases in the interest rates (Figure 31).

 


The minutes of the monetary discussions prior to this interest rate decision will be published on October 19, 2022. The next decision regarding the interest rate will be published at 16:00 on Monday, November 21, 2022.