Remarks by the Governor of the Bank of Israel at the press briefing on monetary policy held today at the Bank of Israel


Hello all.

This is the fourth time we are meeting here for this briefing. When we decided to hold quarterly briefings following the interest rate decisions, we were aware of the great importance not only of the policy decisions, but also of how we explain them to the public. I believe that this method of communication makes it possible for us to better explain policy, and as a direct result, enables you, those active in the markets, and the broad public, to better understand and view policy.
As we announced, today the Monetary Committee decided to maintain accommodative monetary policy and to keep the interest rate unchanged, at 0.1 percent. There are those who are beginning to ask whether the discussions have become boring, and whether the decision was known in advance. My answer is that the environment in which monetary policy operates is as complex as ever, decision-making is not simple, and the discussions are very interesting.  This decision was reached after taking into account a range of considerations resulting from the data presented to the Committee by the Bank’s economists, and in the Committee’s belief that the decision is the most correct one to support the monetary policy targets.
In the three months that passed since the previous press briefing there were a number of changes in the global economic environment, which I will detail in a few moments: While inflation remained low, there are signs that there could be some turnaround in the next few months; the real economic activity environment remained moderate; growth in the fourth quarter was relatively strong, but initial indicators point to some slowdown in the first quarter. In the previous briefing, we discussed the expected divergence of monetary policy of the major central banks.  This divergence has begun, and is expected to continue, but overall, monetary policy around the world is currently expected to be more accommodative, both in Europe and Japan which enhanced monetary accommodation, and in the US, where expectations are for a more moderate increase in the interest rate than what was previously expected.  The exchange rate has remained relatively stable, and housing prices have continued to increase, despite some increase in the interest rate on mortgages and continued growth in supply.  I will go into detail on the developments and how they were perceived by the Monetary Committee, which continues to assess that monetary policy will remain accommodative for a considerable time.
The inflation environment remained very low during the first quarter, in view of price developments initiated by the government and the continued decline in world fuel prices.  In mid-January, oil prices reached a low point of $28 per barrel before climbing back to around $40 in recent weeks.  Inflation in the past 12 months remains negative, while inflation excluding these effects is 0.9 percent this month.  The trends that have affected actual inflation also led to a sharp decline in inflation expectations.  In recent weeks, we have seen a relatively sharp increase in expectations, mainly as a result of a change in direction that is apparent for now in energy and commodity prices. It is interesting that these short-term changes are affecting not only short-term expectations, but also medium- and long-term expectations. In addition, the main effect of the administrative price reductions decided upon thus far is expected to dissipate in the next few months.
In this context, it is important to once again mention that monetary policy cannot and should not offset the price declines that have already taken place.  In regard to inflation looking forward, in the past two years we have seen a relatively large increase in wages in the economy, against the background of the strong labor market data, which is expected to support a return of inflation to within the target range within the time frame prescribed by law. It is important to note that throughout the entire period, the prevailing assessment in the markets remained that over time, monetary policy would achieve the inflation target.
Real economic activity continues to indicate moderate growth despite some acceleration in the fourth quarter of 2015.  In that quarter, the economy grew strongly, by 3.9 percent, with an increase to relatively high growth rates in exports, investments, and public consumption, and despite some effect of the security situation on the consumption of services.  With that, various indicators point to moderation in the first quarter.  Foreign trade data again indicate a slowdown in goods exports, and initial data received from the Companies Survey also indicate moderation.  The stagnation in global trade and the relatively appreciated shekel are making it difficult for exports to lead growth in the near future.  In contrast, private consumption, which is supported by the low interest rates and the increase in wages, is continuing to support activity. Labor market data—low unemployment, high rates of participation, employment, and job vacancies, and as stated, the increase in wages—continue to indicate high demand for labor, and a shortage of manpower in some professions is already becoming apparent. This remains the case despite the fact that the Labor Force Survey for February, which was published today, indicates a slight increase in the unemployment rate and decline in the employment rate.
In the global economy, the trends of moderation are continuing, with an emphasis on the emerging markets and Japan, and with continued moderate and stable growth in the US and Europe. The Chinese economy continues to draw a lot of attention, and the growth rate there continues to be more moderate than in the past. Developments in the global economy have led various policy makers to enhance the extent of monetary accommodation.  In Japan, negative interest on deposits was instituted for the first time.  In Europe, the interest rate on deposits was decreased to even more negative levels and quantitative easing was expanded.  In the US, the Federal Reserve is now expected to increase the interest rate more slowly than expected when it was first raised in December.  The divergence of the monetary policies of the main economies is expected to continue, although the expected interest rate path in all of the main economies is currently lower.  We will obviously need to examine the effects of the monetary measures of the various central banks on the Israeli economy and on the policy required in Israel.
The effective exchange rate remained relatively stable during the first quarter, such that it remains appreciated relative to the level that constitutes equilibrium in line with the basic forces according to various estimates. Israeli exports increased more slowly than world trade in the past year, and the exchange rate apparently had an effect on this. The Bank of Israel’s policy in the foreign exchange market will continue to help achieve policy objectives in this context.
At the beginning of my remarks, I noted that monetary policy is operating in a complex environment, and the housing market has not made this environment simpler in recent months.  Home prices continue to increase at a high rate, and the increase in outstanding housing credit continues, despite the increase in mortgage interest rates.  In 2015, there was a high total of building starts (although most of the growth was not in high-demand areas), and the supply of homes for sale is high.  The government is making many efforts in this area, and it is important that these be continued, and the Bank of Israel is continuing to closely monitor the developments and risks in housing credit.
Today, the Research Department published its updated staff forecast which, as mentioned, is a conditional forecast based on assumptions regarding exogenous variables.  While the forecast for GDP growth in 2016 and 2017 remains virtually unchanged, the interest rate and inflation paths reflect lower projections than in the previous forecast, in view of downward revisions of the global growth forecasts, slightly lower oil prices (despite the increase in recent weeks), and a lower path of interest rates of the main central banks.  As of now, the forecast projects that inflation over the past 12 months will return to within the target range towards mid-2017. I again recommend that we look not only at the forecast itself, but also at the fan charts presented in the document in which it was published, which reflect the existing uncertainty regarding any forecast.
These are the main developments in view of which monetary policy has operated during the first quarter. The low short-term inflation environment, the appreciated level of the exchange rate, the accommodative policy of the main central banks, and the relatively moderate level of activity, led to the Committee’s decision to leave the interest rate at its very low level.  In contrast, the assessments that the low level of inflation of expectations is mainly the result of administrative price reductions and declines in oil prices, the data showing the strength of the labor market, and the risks derived from continued increases in home prices and expansion of housing credit, led the Monetary Committee to the belief that there was no place for additional monetary accommodation.
The Monetary Committee believes that the various developments outlined above justify continued accommodative policy, and I repeat to you today the Committee’s assessment that monetary policy will remain accommodative for a considerable time. Various policy tools, which other central banks have seen fit to utilize in recent years, remain available to the Committee. In our assessment, the prevailing circumstances in the Israeli economy, as outlined above, do not currently justify the use of such tools. The Bank of Israel will continue to closely monitor developments in the global economy and in Israel, and the Monetary Committee will be able to use the policy tools available to it, at any time, should it be necessary.