- The inflation environment continues
to be low. The January CPI was lower than expected, and inflation over the past
12 months remains 0.3 percent. Inflation excluding energy and fruits and
vegetables also remains low. The moderation of inflation is largely influenced
by the appreciation of the shekel. It is possible that in the coming months, the
year over year inflation rate will be negative, but it is expected to move back
toward the lower bound of the target range in the second half of the year.
- Since the previous interest
rate decision, the shekel has strengthened by approximately 3 percent in terms
of the nominal effective exchange rate, a development that continues to weigh
on the return of inflation to the target range.
- The economy continues to
grow at around its long-term growth rate. According to the Research
Department’s assessment, the growth rate in the fourth quarter, net of the
volatility in vehicle imports, was about 3.5 percent, and the growth
encompassed virtually all sectors. Indicators of economic activity in January point
to continued growth, and the labor market remains tight. The interim budget is
expected to have a markedly contractionary effect in the first half of 2020,
and there is continuing uncertainty regarding budgetary policy after the
elections.
- The most recent data
published regarding global economic activity indicate low growth in Europe and
negative growth in Japan, while the US continues to exhibit positive growth. Global
growth forecasts for 2020 were revised slightly downward, and the slowdown in
world trade continues.
- The outbreak of the
coronavirus in China is casting uncertainty regarding future economic activity
globally and in Israel, and regarding the impact on inflation and on the
financial markets. The baseline scenario guiding the assessments of most
international financial institutions is that the spread of the virus will be
halted in the coming months, and the overall impact on the global economy is
expected to be limited. The Bank of Israel’s assessment in this scenario is
that no significant macroeconomic impact is expected in Israel. If the crisis persists
and spills over into additional countries, and particularly if strict preventative
measures are required in Israel, it is expected to have a more significant
impact. In such a scenario, the Monetary Committee has a range of tools to make
monetary policy more accommodative.
The Monetary Committee's assessment is
that in view of the inflation environment in Israel, the monetary policies of
major central banks, developments in the global economy and the risks to the
domestic economy, and the development of the exchange rate, it will be
necessary to leave the interest rate at its current level for a prolonged
period or to reduce it in order to support a process at the end of which
inflation will stabilize around the midpoint of the target range, and so that
the economy will continue to grow strongly. Furthermore, the Committee is
taking additional steps to make monetary policy more accommodative. The Bank of
Israel continues to monitor developments in inflation, the real economy, fiscal
policy, 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 figures accompanying this notice,
clickhere.
The inflation environment continues to be
low. The CPI reading for January declined by 0.4 percent, a greater decline
than expected, and year over year inflation remained below the target range. In
the past 12 months, the inflation rate was 0.3 percent (Figure 1 in the
attached file of figures), and inflation excluding energy and fruit and
vegetables stabilized at a low level, which indicates a low basic inflation
rate (Figure 2). The moderation of inflation does not reflect weakness
in demand, and is largely influenced by the appreciation of the shekel. Inflation
of nontradable goods prices remained moderate, and inflation in the prices of
tradable goods remained negative. Inflation is expected to remain low in the
coming months, and may even become negative, but it is expected to move back
toward the lower bound of the target range in the second half of the year. Most
one-year forecasts and expectations remain around the lower bound of the target
range or slightly below it (Figure 4). Medium-and long-term forward inflation
expectations derived from the capital market continue to be largely stable since
the previous interest rate decision (Figure 5). An analysis of the risk
premium in 5–10-year expectations shows that excluding the premium, inflation
is expected to be above 2 percent in this range. Since the previous interest
rate decision, the shekel has strengthened by about 3 percent in terms of the
nominal effective exchange rate (Figure 6), a development that continues
to make it difficult to return inflation to the target range.
The economy continued to grow at a stable pace around the long-term growth
rate. According to the first estimate of National Accounts data for the fourth
quarter, GDP grew by 4.8 percent (Figure 11), while according to an
assessment by the Bank of Israel’s Research Department, the growth rate net of
volatility in vehicle imports was about 3.5 percent. The growth encompassed
virtually all sectors. Exports (excluding diamonds and startups) grew by 5
percent, driven by services exports, but the prolonged weakness in goods
exports continues. Investment grew by 5.9 percent, while investment in
residential construction again contracted (Figure 12). The Business
Tendency Survey (Figure 13) and the Composite State of the Economy Index
(Figure 14) for January point to continued solid growth at the beginning
of 2020. The labor market remains tight: The unemployment rate remained low,
while the employment and participation rates increased (Figure 17). Wage
increases continue, but their rate of growth slowed somewhat (Figure 19).
The interim budget is expected to have a markedly contractionary effect in the
first half of 2020, and uncertainty remains regarding budgetary policy following
the elections and its implications for economic activity and inflation.
For most of the period since the previous interest rate decision,
equity markets in Israel were relatively stable, but in recent days, there have
been sharp price declines. Long-term government bond yields declined since the
previous interest rate decision, similar to declines in yields in Europe and
the US, and the declines have grown stronger in recent days (Figure 7).
Home prices increased in the past year by about 3 percent. The number
of home purchases grew, led by first-home purchasers and buyers upgrading their
housing situation. Mortgage volume continued to expand, with some increase in
leverage levels, and mortgage interest rates continued to decline.
The most recent data published regarding global economic activity
indicate low growth in Europe and negative growth in Japan, while the US
economy continues to exhibit positive growth. Investment houses’ global growth
forecast for 2020 were revised slightly downward, while the revision for growth
in China is more significant (Figure 20). The slowdown in world trade
continues (Figure 21), but the political risks have moderated in view of
the signing of the first stage of the trade agreement between the US and China,
and the decline in uncertainty surrounding the progress of the Brexit process. Headline
inflation in the major economies increased, but inflation continues to be lower
than the central banks' guiding targets (Figure 23). The US economy grew
by 2.1 percent in the fourth quarter of 2019. The Federal Reserve kept the
federal funds rate unchanged, and signaled that the rate is expected to remain
at its current level unless there is a significant change in the state of the
economy. In Europe, growth remains low, with contraction in France and Italy, and
near-zero growth in Germany, and the manufacturing sector continues to weigh on
activity. The ECB left its interest rate unchanged, and signaled that it expects
to leave its policy in place for a considerable time. In Japan, there was significantly
negative growth in the fourth quarter following a number of one-off effects,
and there are signs that the slowdown will continue. Data on 2019 activity in
China were positive, but the long-term trend of moderation continues, and the
outbreak of the coronavirus is expected to weigh on growth in Asia at least in
the short term. Prices of oil and commodities used in manufacturing declined in
view of an expectation of a significant decline in demand from China (Figure
24).
The outbreak of the coronavirus in China is casting uncertainty over a
range of areas—future economic activity globally and in Israel, and the impacts
on inflation and on the financial markets. The baseline scenario guiding the assessments of most international
financial institutions is that the spread of the virus will be halted in the
coming months, and the damage to the Chinese economy will be restricted mainly to
the first quarter of 2020. In this scenario, the growth rate in later quarters
is expected to compensate, so that the overall effect on the global economy
will be limited. According to the Bank of Israel’s assessment, beyond the impact
on specific companies, this scenario is not expected to have a significant
macroeconomic effect in Israel, even though China is a significant trading
partner in a range of industries. If the crisis persists and flows over into
other countries, and particularly if strict preventive measures will be
required in Israel, it is expected to have a more significant impact, the scope
of which is difficult to assess at this stage. The decline in global demand for
various goods is expected to slow the rate of inflation, but on the supply
side, the shortage of goods and raw materials imported from China may serve to
increase inflation somewhat. Until recently, the reaction in the financial
markets was moderate, but in recent days, the uncertainty has increased and
there have been sharp declines in equity markets.
The minutes of the monetary discussions
prior to this interest rate decision will be published on March 9, 2020. The
next decision regarding the interest rate will be published at 16:00 on Monday,
April 6, 2020, followed by a press briefing by the Governor.