The Monetary Policy Report, January–June 2013

To the press release as a Word document

To the report


  • Monetary and macroprudential policy:  During the first half of 2013, the Monetary Committee lowered the interest rate by 0.75 percentage points to 1.25 percent for July.  In view of the continued appreciation in the shekel exchange rate, the Committee decided in April to intervene in the foreign exchange market, and it decided in mid-May, in addition to lowering the interest rate, to implement a foreign exchange purchasing program in order to offset the effect of local natural gas production on the exchange rate.  These measures were intended to strengthen the economy’s ability to deal with the possible ramifications of the deepening slowdown in the global economy, and to moderate the pressure for appreciation that derived from accommodative monetary policy worldwide and from the expected improvement in the balance of payments as a result of the production of local natural gas.  All this was against the background of the continued moderation in the inflation environment and the continued moderate growth in the economy, taking into account the risks implicit in the rapid increase of home prices and the measures adopted by the Supervisor of Banks to reduce them. The interest rate for August was left unchanged at 1.25 percent.

  • Inflation and inflation expectations: The Consumer Price Index increased during the reviewed period by 1.3 percent, and increased by 1.1 percent on a seasonally adjusted basis.  Actual inflation (over the previous 12 months) continued to decline, and fell below the lower bound of the price stability target range in April, but again increased to the center of the target range in June.  Forecasters’ projections and 12-month inflation expectations as derived from the capital markets ranged slightly below the center of the target range throughout the reviewed period.

  • Domestic real economic activity: During the first quarter of 2013, GDP grew by 2.9 percent, similar to its average pace of growth in 2012, with a slowdown in growth of business sector product alongside an expansion of exports and of private consumption and a worsening decline in investments.  In the labor market, the decline in the unemployment rate was halted, with a slowdown in expansion of employment and a decline in real wages.

  • The global economic environment: The situation in Europe continued to be a main risk to global growth, and in recent months, there was an added risk of a deepening slowdown in the emerging markets.  During the reviewed period, the contraction in activity in Europe continued, and the slowdown spread into Germany and France as well.  In the US, the recovery continued with a decline in the unemployment rate and an improvement in the housing market.  The slowdown in the large emerging markets continued, and in recent months, there have been increasing signs of the slowdown deepening.  The worsening slowdown in the global economy was reflected in the continued stagnation in global trade.  In response to the worsening of the real economic situation worldwide, the leading central banks continued to adopt accommodative monetary policies, which was expressed in a continuation—and even an increase—of quantitative easing programs and interest rate reductions.  Against the background of the improvement in macroeconomic conditions in the US, the Federal Reserve announced in June that it would reduce quantitative easing should the improvement continue.

  • The exchange rate: During the reviewed period, the shekel strengthened by about 5.5 percent against the effective exchange rate, against the background of accommodative monetary policy worldwide and the growing expectations of appreciation due to the expected improvement in the balance of payments as a result of the production of local natural gas.  Following the measures adopted by the Bank of Israel in May, the shekel weakened sharply in a short period of time, but it strengthened again in June.

  • The financial markets: During the reviewed period, domestic stock prices increased by about 2 percent.  The development of stock prices was not uniform during the reviewed period: they increased in January to May and again declined in June against the background of the sharp declines recorded in global stock markets.  Yields on government bonds increased in June following yield increases worldwide, which took place against the background of the expected reduction in quantitative easing in the US.  Credit to the business sector remained stable, with a decline in the volume of bank credit and an increase in nonbank credit.  In contrast, credit to households increased, with the increase taking place almost exclusively in housing credit.  The spreads in the corporate bond market continued to decline, and reflected, inter alia, a decline in the risk estimation of companies in the economy.

  • Fiscal policy: Until the budget plan was approved by the government, there was uncertainty regarding how the new government would deal with the need to bring the budget in line with the deficit and expenditure limits, and there was concern that exceeding the government deficit would negatively impact the credibility of policy.  At the beginning of May, the government approved the budget plan for 2013 and 2014.  If the budget approved by the Knesset maintains the aggregates as approved by the government, the deficit is expected to be 4.65 percent of GDP in 2013 and 3 percent of GDP in 2014.

  • The housing market:  During January and February, the upward trend in home prices continued in parallel with the slowdown in building starts and the increase in the number of transactions and the volume of mortgages.  In March and April, there was a slight decline in home prices, but it is still too early to assess whether there has been a turnaround in the housing market.  In view of the accelerated growth in housing credit that has taken place in recent years, with its concomitant increase in risk, the Supervisor of Banks published a directive in February to increase capital buffers and the provisions required in respect of the risks inherent in the housing credit portfolio.

  • The forecast: Based on the staff forecast which was published at the end of June 2013, the Research Department projects that the rate of inflation during the next four quarters will be near the center of the price stability target range, and the Bank of Israel interest rate is expected to remain at its current level.  The growth forecast for 2013 remained unchanged at 3.8 percent of GDP, with the main growth factors being the expected growth in public consumption and savings in expenditures on imported energy products due to the production of local natural gas.  In contrast, a slowdown is expected in exports, private consumption, and investments.  The forecast for 2014 was revised downward to 3.2 percent of GDP, mainly due to the restraining effects of the budget plan and the downward revision of the global forecast.