Bank of Israel Monetary Policy Report, Second Half of 2021
This report surveys the monetary policy during the second half of 2021 and the beginning of the first half of 2022. During the six months being surveyed and following the exit from the third lockdown, the Israeli economy recovered rapidly, and it appeared that economic activity was returning to normal. This was in view of the vaccinations’ efficiency, which led to a sharp decline in rates of infection and allowed for the loosening of restrictions on activity. Later during this half year, the Delta variant of the COVID-19 virus began to spread and the number of severely ill patients increased; this was alongside a third round of vaccinations. The economy coped with this wave of infection with a minimum of limitations relative to the previous waves. Nonetheless, there remained a high degree of uncertainty regarding economic activity, due to the COVID-19 virus and in particular the spread of the Omicron variant toward the end of the surveyed half year.
Monetary policy: The rate of interest was left unchanged at 0.1 percent during the second half of 2021. It was also decided to end the use of the special tools that had been announced by the Monetary Committee at the height of the COVID-19 crisis in 2020. In view of the continuing effect of COVID-19 on economic activity, the Bank of Israel purchased $34.8 billion during 2021. Thirty billion dollars were purchased in accordance with the decision of the Monetary Committee at the beginning of the year while the remainder was purchased in November–December after the Committee announced that intervention in the market would continue.
Domestic real activity: The data and indicators presented to the Committee during the period being reviewed indicated a relatively rapid pace of recovery in GDP and employment and that GDP is approaching the levels that would have been expected had there not been a COVID-19 crisis. This is after dealing with the three lockdowns imposed during 2020 and the first half of 2021 and with a fourth wave during the period being surveyed, which led to only relatively light limitations on activity. Nonetheless, as of the end of the half year reviewed, not all limitations have been lifted, and in particular there remain significant limitations on incoming tourism. After the approval of an outline that was to have allowed a marked increase of inbound tourism, the spread of the Omicron variant led to a considerable closing of the skies by the imposing of significant restrictions on activity at Ben Gurion Airport.
The labor market: The data from the Labor Force Survey for November (ages 15+) showed stabilization of the broad unemployment rate at a level of approximately 6.5 percent, and an adjusted employment rate of about 60 percent, compared to about 61 percent prior to the crisis, in 2019. The number of job vacancies during the half year being reviewed continued to rise, a continuation of the trend since the beginning of 2021. This phenomenon is characteristic of other advanced economies that experienced a rapid increase in the number of unemployed persons against the background of government policy regarding unpaid leave. With the easing of limitations and the rapid growth in GDP, new job vacancies were bring created, and are being filled at a relatively slow pace, which may indicate an increase in the structural unemployment rate.
Inflation: The second half of 2021 was characterized by a high inflation environment relative to recent years. At the beginning of the year, the annual rate of inflation entered the target range and subsequently continued to rise to above the midpoint of the target range and reached 2.5 percent. Toward the end of the year, it moderated somewhat to 2.4 percent. Inflation expectations for the coming year increased according to all sources, and are around the midpoint of the target range. However, there is a gap between expectations derived from the capital market and the lower forecasts by analysts and expectations derived from the banks’ internal interest rates. It appears that this gap reflects the risk premium. According to the various forecasts, the rate of inflation is expected to moderate somewhat but is expected to remain within the target range for all terms.
The exchange rate: The shekel was stable until the end of the first half of the year, both in terms of the nominal effective exchange rate and against the dollar and the euro, against the background of the approximately $25 billion purchased by the Bank of Israel. During the second half of the year—the one being surveyed—there was a trend of appreciation in the shekel. Also during this half year, there were high levels of foreign currency conversions by institutional investors and nonresident investors, which worked toward the appreciation of the shekel, and the pace of purchases by the Bank of Israel declined.
The global economy: During the half year being surveyed, the global economy continued to recover, against the background of the moderating rate of morbidity and an increase in levels of vaccination, which was accompanied by the removal of limitations on economic activity. At the same time, it appears that the momentum weakened due to problems in the global production chain and the rise in energy prices, which increases the risk of inflation, and a renewed outbreak of the pandemic. The global inflation environment remains high, and the inflation rate in most countries is above target. In the IMF’s global growth forecast, at the beginning of the period being surveyed the growth rate for 2022 improved somewhat, and was stable during it; while the forecast for 2021 remained essentially unchanged during the half year being surveyed. So far, interest rates have been raised only in countries where inflation has deviated markedly from its target.
The credit market: During the half year being surveyed, interest rates remained stable at low rates. An examination of financing difficulties based on the Business Tendency Survey conducted by the Central Bureau of Statistics showed similar levels to those prior to the crisis—in contrast to the previous half year, in which small and micro businesses found it more difficult to obtain credit than during the pre-crisis period. At the same time, the credit constraints in the hotel industry remained significant during the surveyed period as well. The bank interest rates remained stable in all activity segments; therefore, and against the background of the economic recovery, the Bank of Israel ended programs that offered inexpensive sources of financing to banks for the providing of loans to small and micro businesses, which were intended to help businesses endure the COVID-19 crisis.
Developments in the financial markets: In the capital market, equity prices in the various sectors increased during the half year being surveyed. Corporate bond spreads also grew, although more moderately. The yields on 10-year Israeli government bonds declined at the beginning of the half year being surveyed and rose towards the end of it, similar to the global trend. Assessments from the Telbor market with respect to expectations of the Bank of Israel interest rate changed during the course of the reviewed half year, and in the fourth quarter they increased to a level that implied a likelihood of 100 percent that there would be at least one interest rate hike of 15 basis points in the coming year (to 0.25 percent). That was the highest probability observed since the outbreak of the pandemic in March 2020. At the end of the half year there was a decline in those expectations, similar to trends in other countries.
Fiscal policy: The cumulative deficit continued to decline during the half year being surveyed, to 4.6 percent, due to the continued marked growth in tax revenues (even relative to the long-term trend), alongside a decline in government expenditure—the result of reduced COVID-19 expenditures and underperformance of the allocated interim budget, as well as a relatively slow increase in expenditure even after the approval of the budget. The proposed budget for 2021–22 received final approval by the Knesset at the beginning of November and contributed to reducing fiscal uncertainty. The new deficit targets are 6.8 percent for 2021 and 3.9 per cent for 2022, which are lower than the current deficit forecasts for those years.
The housing market: The trend of accelerating increase in home prices, which began toward the end of 2020 and intensified during 2021, continued during the period being surveyed as well. Home prices have increased during the previous 12 months by 10.3 percent (the figure for September-October). The Committee discussed the rise in home prices, which developed against the background of a reduction in the purchase tax for investors in July 2020 and the discontinuation of the Buyer’s Price program. During the period being surveyed, new government programs went into effect that are intended to halt the marked increase in home prices, including an increase in the purchase tax for investors. Alongside these, the increase in rents remained relatively moderate for most of the period being surveyed, similar to the pace in the previous half of the year and a continuation of the notable moderation seen in 2020. Toward the end of the period being surveyed there was some acceleration—through November the Owner Occupied Housing Services Index had risen by an annual rate of about 2.9 percent.
The Research Department forecast: The Research Department published three forecasts during the period being surveyed, simultaneous with announcements of the interest rate–in July and September 2021 and in January 2022. According to the January forecast, GDP will grow by 5.5 percent in 2022 (it was 6.0 percent according to the July forecast) and the unemployment rate is expected to continue its decline to a level of about 4.8 percent in the fourth quarter, which is still above its pre-crisis level (of about 3.8 percent). The debt to GDP ratio is expected to be 69 percent in 2022 (74 percent according to the July forecast). Inflation during the next four quarters (the last of which is the fourth quarter of 2022) is expected to be 1.6 percent.
 Decisions were made on July 5th, August 23rd, October 7th, and November 22nd 2021 and on January 3rd 2022.
 The broad rate of unemployment is the ratio of: the unemployed (the conventional definition of unemployment), the employed who are temporarily absent from work for the entire week for reasons related to the COVID-19 virus (including those on unpaid leave) and non-participants in the labor force who have stopped working due to layoffs or the closing of their place of work since March 2020, to total participants in the labor force aged 15+.
 The rate of employment without absentees from work due to the COVID-19 virus.
 For an expanded discussion see Box 2 later in this report.