The Monetary Committee decides on May 29, 2017 to keep the interest rate unchanged at 0.1 percent


Excel​ sheet​ (hebrew)​

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The annual inflation rate and 1-year inflation expectations increased but remain below the target range, and expectations for the medium and long terms are anchored within the target. The increase in nominal wages and strong economic activity will contribute to an increase in the inflation rate, while the appreciation that has occurred in the shekel, the increased competition in the economy and measures adopted by the government are expected to delay the return of inflation to the target range.

·     National Accounts data for the first quarter (net of the volatility in vehicle imports) and indicators of second quarter activity show that the economy continues to grow at a solid pace, with a decline in private consumption’s contribution to growth and an increase in the contribution of exports and investment. The labor market continues to convey a very positive picture and is near full employment.

·    Global activity and world trade continue to improve gradually, and according to forecasts, the improvement is expected to continue. The political risk in Europe declined significantly. The interest rate in the US is expected to be increased in June, while in Europe and Japan the accommodative policy continues.

·    In recent weeks, the shekel weakened against the euro and strengthened against the dollar. The effective exchange rate remains stable at an appreciated level.

·     Housing market indicators continue to point to a cooling of the market, and stability in home prices is apparent over the past few months.

 

The Monetary Committee intends to maintain the accommodative policy as long as necessary in order to entrench the inflation environment within the target range. 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.


 

Inflation in the 12 months ending in April was 0.7 percent. The annual inflation rate and one-year inflation expectations increased in recent months, though they are still lower than the target range (Figures 1 and 4 in the data file). The increase in nominal wages and strong economic activity, particularly as a result of domestic demand, are reflected in increases in the prices of nontradable items, while inflation in tradable goods remains negative (Figure 3), due to a large extent to the continued appreciation of the shekel, and despite energy prices and global inflation acting to increase it. Since March, there has been an increase apparent in inflation expectations for all terms, against the background of an increase in actual inflation and continued accommodative monetary policy. The increasing competition in the economy, as well as additional policy measures announced by the government (reducing purchase tax and customs on various products and lowering the cost of afterschool care), may continue to slow the return of inflation to the target range.

 

The volatility in vehicle purchases had an atypical effect on National Accounts data in the fourth quarter of 2016 and the first quarter of 2017. However, net of this effect, the economy has been growing strongly for approximately a year and a half, and the pace may even be higher than the long-term growth potential. In the first quarter, the improvement in growth of exports continued, against the background of the expansion of world trade. Private consumption, which drove growth in 2016, continues to grow (net of vehicle purchases) but at rates that are not exceptional. Excluding the data on goods exports, the initial indicators of second quarter economic activity, such as data on tax revenues and the Composite State of the Economy Index, suggest that the strong growth is continuing in the quarter. Labor market indicators continue to point to its robustness: the unemployment rate is at an historic low, the employment rate is at a record high, and in the past year the improvement in these indicators was sharper among those with lower levels of schooling (Figure 13). The pace of wage increases has accelerated (Figure 14), and the number of work hours per employee has increased.

 

For the past few months, housing market data have indicated moderation in demand for homes, reflected in a decline in transaction volume among all types of purchasers, a decline in the pace of new home sales, and continued decline in the flow of new mortgages taken out. There are a number of factors to which this moderation in demand may be attributed, including various policy measures adopted by the government and the increase in mortgage interest rates since mid-2015. In recent months, interest rates on mortgages have stabilized (Figure 8). The moderation in demand alongside the continued increase in supply have led to the apparent stability in home prices.

 

Global economic activity and world trade continue to improve gradually (Figure 17). The IMF and investment houses forecast that the improvement will continue, and sentiment indices are high. The weakness in first quarter growth in the US derives partially from transitory and seasonal factors, and most of the data indicate improvement in the second quarter. Despite some moderation in inflation, assessments are that the Federal Reserve will raise the federal funds rate at its next meeting. The new administration’s economic policy remains a source of uncertainty. In Europe, the results of France’s presidential elections markedly lowered the risk to the continued existence of the eurozone, and the economy continued to improve. Growth in the past two quarters was relatively high, the unemployment rate continues to decline, but inflation is still below target and the ECB is continuing its accommodative policy. In Japan as well, growth data are relatively strong, but inflation remains low and accommodative policy continues. In emerging markets, in general, the positive trend continues. The modest moderation in China is mainly a result of policy measures intended to tighten financial conditions. Energy prices were volatile, while the index of prices of commodities excluding energy was relatively stable.

 

The minutes of the monetary discussions prior to this interest rate decision will be published on June 12, 2017.

The next decision regarding the interest rate will be published at 16:00 on Monday, July 10, 2017, following which the Governor will hold a press briefing.