The Monetary Committee decides on October 7, 2021 to keep the interest rate unchanged at 0.1 percent

  • The fourth wave of the COVID-19 virus in Israel is abating.  The economy’s handling of this morbidity wave did not include serious restrictions on activity.  However, there is still a great extent of uncertainty regarding economic activity in the medium term, mainly in view of the risk of cyclicality of additional morbidity waves.
  • The available indicators of economic activity show that even at the peak of morbidity during the fourth wave, there was no significant decline in activity or in demand.
  • The Research Department revised its staff forecast upward.  Its assessment is that GDP will grow by 7 percent in 2021, and by 5.5 percent in 2022.
  • Labor Force Survey data for the first half of September indicate stability in the unemployment rate.  The number of job vacancies continued to increase, further to the trend since the beginning of the year, and the shortage of workers continues to weigh on the expansion of activity. 
  • The upward trend in inflation continues.  Inflation in the past 12 months is 2.2 percent.  One-year inflation expectations from all sources increased, and are within the target range.  According to the various forecasts, the pace of inflation is expected to moderate later on.
  • Since the previous interest rate decision, the shekel weakened by 0.5 percent against the dollar.  The shekel strengthened by 1.1 percent against the euro, and by 0.3 percent in terms of the nominal effective exchange rate.
  • Home prices increased by about 8 percent in the past 12 months, a more rapid pace than in previous years.  The pace of increase in rental prices remained relatively moderate.  There is a prolonged marked decline in building completions.
  • The global economy continues to recover in view of the moderating morbidity rates and the increase in vaccination rates.  However, it seems that momentum has weakened due to difficulties in the global production chain and the increase in energy prices that are increasing existing inflation risks.  Some of the central banks have started to gradually reduce their monetary accommodation.

The Israeli economy’s process of recovery from the crisis continues.  However, there are still challenges to economic activity.  The Committee will therefore continue to conduct an accommodative monetary policy for a prolonged time.  Continued economic activity and sound growth will make it possible to end the various quantitative easing programs in the coming months. This is all in order to continue supporting the attainment of the policy targets and the recovery of the economy from the crisis, and to ensure the continued orderly functioning of the financial markets.

 

 For the file of figures accompanying this notice, click here.​​

The fourth wave of the COVID-19 virus in Israel is abating, with a decline in morbidity rates, contagion coefficients, and the number of seriously ill patients. The economy dealt with this wave differently than with previous ones, and the process did not include severe restrictions on activity. This was made possible partly due to the vaccinations, and it seems that the third (booster) shot of the vaccine is also having a positive effect. The ability to conduct on-going economic activity alongside the COVID-19 virus can also be seen in the encouraging economic growth data. However, there is still a great deal of uncertainty regarding economic activity in the medium term, mainly in view of the risk of cyclicality of additional waves of morbidity.

 

The available indicators of economic activity show that despite the increase in morbidity, there was no significant decline in activity or in demand. Total credit card purchases declined moderately in August, following the expansion of restrictions, but increased again, rapidly, in September (Figure 4). There was a significant increase in purchases in the restaurants and domestic tourism industries (Figure 5). According to the Central Bureau of Statistics Business Tendency Survey, the total net balance of the business sector in September declined slightly, but remained at a high positive level (Figure 2). Goods exports (excluding ships, aircraft, and diamonds, in dollars) declined slightly in August, but remained higher than they were prior to the crisis. Services exports continued to trend upward (Figure 6). Goods imports also continued to trend upward, and are at high levels in all components (Figure 7).

 

The Bank of Israel Research Department updated its macroeconomic forecast. Its assessment is that GDP will grow by 7 percent in 2021, and by 5.5 percent in 2022 (Figure 1). The adjusted employment rate will increase throughout the forecast period, to 59.5 percent at the end of 2022. The broad unemployment rate is expected to be about 5.2 percent at the end of the period, compared with an average level of 3.8 percent in 2019. The inflation rate is expected to be 2.5 percent in 2021, but looking at the next four quarters, inflation is expected to gradually moderate to 1.7 percent. In addition, assuming that the State budget is passed as planned and that the fiscal adjustment will be pushed off to 2023 and onward, the debt to GDP ratio is expected to be 73.5 percent in 2021 and 73 percent in 2022.

 

Since the exit from the third lockdown, there has been an increase in the adjusted employment rate (according to which COVID-19-related absentees are not considered employed), and a decline in the broad unemployment rate. The improvement follows a reduction in support for COVID-19-related unemployed. However, since August, the improvement in the employment indices has slowed. Labor Force data for the first half of September (aged 15+) indicate stability in the broad unemployment rate at 7.9 percent (Figure 8) and in the adjusted employment rate at 58.7 percent, while the latter was 61.1 percent in 2019, prior to the crisis (Figure 9). This represents a gap of about 168,000 employees (2.4 percentage points) compared with the average employment rate in 2019. The number of job vacancies continues to increase, further to the trend since the beginning of the year (Figure 10). This phenomenon is typical of other advanced economies that have experienced a rapid growth in unemployment due to governmental furlough policies that led to new job vacancies being created with the easing of restrictions and the rapid growth of GDP, which were filled relatively slowly. This may indicate a higher structural unemployment rate. According to the Business Tendency Survey, the shortage of workers continues to weigh on the expansion of activity, particularly in the hotels, manufacturing (professional employees), and services industries (Figure 11).

 

The upward trend in inflation continues. The CPI reading for August was up by 0.3 percent, and inflation in the past 12 months is 2.2 percent (1.9 percent net of energy, fruits and vegetables; Figure 14). Inflation of the prices of nontradable components continues to trend upward, while the inflation rate of prices of tradable goods remained stable (Figure 15). The upward trend in one-year inflation expectations from all sources also continues, but expectations are within the target range. However, there is a marked gap between expectations derived from the capital market and those of the professional forecasters and the banks, which are lower (Figure 16). Medium-range expectations increased, and long-term expectations remained anchored at the midpoint of the target range (Figure 17). The Monetary Committee is closely monitoring these developments, and maintains its assessment that there is no concern of an inflationary outbreak.

 

Since the previous interest rate decision, the shekel weakened by 0.5 percent against the US dollar, while it strengthened by 1.1 percent against the euro, and by 0.3 percent in terms of the nominal effective exchange rate (Figure 18).

 

Home prices increased by about 8 percent in the past 12 months (Figure 22)—a faster rate than in previous years—and the decline in building completions continues (Figure 23). In July, there was some moderation in the volume of transactions among all types of purchasers, but their level remained high. The volume of new mortgages taken out in August was similar to previous months, further to the high volume of new mortgages since the beginning of the year (Figure 24). Alongside this, the pace of increase in rental prices remains relatively moderate.

 

In the capital market, equity prices increased during the reviewed period, in contrast with the global trend, and corporate bond spreads declined slightly (Figures 36 and 21). Yields on 10-year government bonds in Israel increased by about 25 basis points, similar to the global trend (Figure 19). The credit market continues to function well, with stable and low interest rates (Figures 26 and 27). The Central Bureau of Statistics Business Tendency Survey examination of financing difficulties among large businesses continues to show similar levels to those prior to the crisis (Figure 25).

 

The global economy continues to recover in view of the moderating morbidity rates and the increase in vaccination rates. However, it seems that the momentum has weakened due to difficulties in the global supply chain and higher energy prices that are increasing the existing inflation risks. There was no material change in the investment houses’ forecasts of the expected global growth rate, but broken down into blocs, there was a decline in the forecasts for the US and Japan and an increase in the forecasts for Europe and the emerging economies (Figure 28). The global purchasing managers indices moderated, but continue to indicate economic expansion (Figure 30). The volume of world trade moderated as well, but remains at high levels of activity. The major stock indices in the US and Europe declined. The prices of oil and natural gas increased significantly during the period. The global inflation environment remains high (Figure 31), but the baseline assessment of the central banks in leading economies and of the capital markets is that a significant portion of the increase is not expected to persist (Figure 32). Inflation indices in many countries are high, and in some of them the index has surpassed the inflation target. In the US, the Federal Reserve left the interest rate and purchasing program unchanged, but signaled a reduction of the purchasing program in the near future, and brought forward the forecast for the first increase in the interest rate to the end of 2022. In the eurozone, the ECB left the interest rate unchanged, but slowed its purchasing program. In the UK, in view of the increased inflation risk, the Bank of England signaled a future rate increase. In China, there was a slowdown in economic activity, particularly industrial production. Likewise, there were interest rate increases in a number of countries that are experiencing considerable inflationary pressures.

 

The minutes of the monetary discussions prior to this interest rate decision will be published on October 21, 2021. The next decision regarding the interest rate will be published at 16:00 on Monday, November 22, 2021.

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