- The inflation rate has stabilized
above the lower bound of the target range, notwithstanding the slightly lower
than expected decline of 0.3 percent in the CPI for November. In the past six
months, the annual inflation rate has ranged between 1.2 percent and 1.4
percent. In the coming months, inflation is expected to range around the lower
bound of the target. The Research Department forecasts inflation of 1.3 percent
over the coming four quarters. Medium-term expectations remained entrenched
within the target range. Continued wage increases and the economy being around full
employment will support a continued rise in inflation toward the midpoint of
the target range, as will the depreciation, to the extent it persists.
- An analysis of recent data
and of updated indicators of economic activity continues to support the
assessment that the economy is converging to its potential growth rate, despite
the low growth in the second and third quarters. The tight labor market
supports this assessment, as does the growth of imports and the widening of the
trade deficit. Indicators of fourth quarter activity point to some acceleration
in the growth rate.
- The global macroeconomic
picture continues to convey a slowing of momentum, high volatility, and lack of
certainty. The US economy remains robust, though the risks due to the worsening
“trade war” and the slowing in Europe continue to weigh on momentum. There were
price declines and sharp volatility in most equity indices, and expected monetary
contraction worldwide is seen to be slowing.
- Since the increase in the
interest rate, the nominal effective exchange rate has been relatively stable,
after the shekel depreciated in the preceding weeks.
The Committee assesses that the rising
path of the interest rate in the future will be gradual and cautious, in a
manner that supports a process at the end of which inflation will stabilize around
the midpoint of the target range, and that supports economic activity. The Bank
of Israel continues to monitor developments in inflation, the real economy, the
financial markets, and the global economy, and will act to attain the monetary
policy targets in accordance with such developments.
For the file of data accompanying this notice, clickhere.
The inflation environment has stabilized above the lower bound of the
target range, even though the CPI reading for November declined by 0.3 percent
and was slightly lower than expected. In the past six months, the annual
inflation rate has ranged between 1.2 and 1.4 percent, but the index adjusted
for the effect of energy, fruit and vegetable prices, as well as the price
changes initiated by the government, is slightly lower (Figure 2 in the
attached data file). Inflation in tradable goods prices continued to moderate,
primarily as a result of the decline in energy prices. Inflation in prices of nontradable
items, which serves as an approximation of the domestic component of inflation,
continued to increase (Figure 3). In the coming months, inflation is
expected to range around the lower bound of the target, and 1-year expectations
and forecasts from the various sources range between 0.9 percent and 1.2
percent (Figure 4). The Research Department expects inflation of 1.3
percent over the coming four quarters. Expectations for medium terms remained
entrenched within the target range, and in recent months there was some decline
in longer-term expectations (Figure 5). Since the increase of the
interest rate, the nominal effective exchange rate has remained relatively
stable, following a depreciation of the shekel in the weeks prior to the increase
(Figure 6). The continued increase in wages and the economy being around
full employment will support a continued rise in inflation toward the midpoint
of the target, as will the depreciation, to the extent it persists. The steep decline
in oil prices in recent months may offset the factors supporting inflation, but
its impact on the “adjusted indices” will be limited.
Since the previous interest rate decision, government bond yields have
been relatively stable, despite the sharp decline in parallel yields in the US.
The yield spreads between corporate bonds and comparable government bonds
increased. In the past two months, Tel Aviv Stock Exchange equity indices
declined by approximately 10 percent (Figure 10), which is in line with
the marked declines on major global equity indices (Figure 25).
Regarding economic activity, the first estimate by the Central Bureau
of Statistics for full year growth in 2018 is 3.2 percent, similar to the
long-term growth rate. After the growth rate slowed in the second and third
quarters of 2018, the findings from the fourth quarter Companies Survey (Figure
14) and data on tax revenues support the assessment that the economy is growing
at a pace hovering around the long term path. In addition, the Composite State
of the Economy Index, which increased by 0.3 percent in November, with data for
October revised upward, even hints at a faster pace in the fourth quarter (Figure
13). Labor market data show that it remains tight—the unemployment rate
remains low, although there was an increase in unemployment benefit claims in
recent months; the share of job vacancies out of total employee posts is at a
peak (Figure 18); and wages continue to increase (Figure 19). All
of these support the assessment that the economy is around full employment, thus
creating a supply constraint. The increases of imports and the widening of the trade
deficit also support this assessment. According to the Research Department’s
assessment, GDP is expected to grow by 3.4 percent in 2019, slightly lower than
the previous forecast, and by 3.5 percent in 2020. Growth in those years will
be positively impacted by notable activity of several large companies.
Home prices have stabilized in recent months (Figure 9), with a
continued decline in building starts and an increase in the number of those
planning to purchase a home. Moderate growth in mortgage volume continued; mortgage
interest rates rose moderately, while the spread between them and government
bond yields has narrowed (Figure 11).
The macro picture conveyed by the global economy continues to indicate
declining momentum, high volatility, and uncertainty. It appears that the risks
due to a worsening of the “trade war” are trickling down to the business
activity of leading corporations as well. Investment houses revised their
growth forecasts downward for most regions (Figure 20), and the moderation
in world trade continues among the advanced economies (Figure 21). The expected
global monetary contraction is projected to slow. Despite the continued
increases in the interest rates of the US and some other economies, US markets
are no longer pricing in an additional rise, and European markets have pushed
off the timing of an expected interest rate increase. In financial markets,
there were sharp declines and volatility in most equity indices (Figure 25),
government bond yields declined, and corporate bond spreads widened. The US economy
continued to grow at a rapid pace, but the rate is expected to moderate
slightly in the fourth quarter. The major economies in Europe convey a mixed
picture—there was positive growth in France and Spain, while contraction was
seen in Germany and Italy. There was accelerated growth in the UK, but the
uncertainty regarding Brexit remained high. In Japan, the economic activity
data published in the fourth quarter indicate a recovery, following contraction
in the third quarter. Emerging markets are relatively stable, but the growth
rate may be negatively impacted by a possible deterioration in the “trade war” and
the effects of monetary contraction in advanced economies. Growth in China
continued to weaken in the fourth quarter as well, mainly in the manufacturing
sector. Oil prices continued to decline until recently, despite the decision by
oil producers to cut back on output (Figure 23).
The minutes of the monetary discussions prior to this
interest rate decision will be published on January 21, 2019. The next decision
regarding the interest rate will be published at 16:00 on Monday, February 25,
2019.