The Report (Preliminary Version)

Monetary policy: During the second half of 2015, the Monetary Committee decided to leave the interest rate at a level of 0.1 percent. For both January and February, which belong to the first half of 2016, the Monetary Committee also decided to leave the interest rate at the same low rate. In the announcements of the interest rate decisions for November and December—as well as the announcements for January and February—the Committee made use of forward guidance in announcing that monetary policy is expected to remain accommodative for a considerable time, even in view of the increase in the US federal funds rate. In addition, the Bank of Israel continued to purchase foreign currency.
Inflation and inflation expectations: During the twelve months ending in December 2015, the CPI declined by one percent. The energy component continued making the main contribution to the CPI, as a result of the sharp decline in global oil prices. The policy measures adopted by the government, and primarily the reduction in VAT and the cancelation of the television levy, also contributed to the decline in the CPI. Net of the direct effect of energy prices and the government policy measures, the CPI rose by 0.6 percent. Inflation expectations for the next year, based on the various sources, remained lower than the target range, although the forward expectations for the medium and long terms are at the center of the target range or slightly below it.
Domestic real economic activity: The economy resumed growth at the moderate rate that has characterized it during the last two years. GDP grew by a rate of 2.1 percent during the third quarter of 2015, after stagnating during the second quarter. This was due to, among other things, the drop in exports as a result of factors of a transitory nature and the decline in the rate of growth in world trade. Nondurables private consumption continued to lead economic growth. In the labor market, employment continued to grow, unemployment remained low and wages continued to rise at a moderate rate. The indicators for the end of the period being surveyed pointed to an improvement in domestic activity and exports.
The exchange rate: The nominal effective exchange rate (the average in December relative to the average in July), of the shekel remained stable. Relative to the dollar, it depreciated by about 2 percent and relative to the euro it appreciated by about 1 percent. Various models of the equilibrium exchange rate indicated that the shekel was overvalued.
The global environment: The global economy continued to grow at a moderate pace. Advanced economies grew moderately while emerging markets, and primarily China, experienced a decline in growth rates. This development was accompanied by volatility in the markets and sharp declines in commodity prices. In the US, despite the low rate of inflation, the continuing improvement in the labor market and the assessment that inflation is expected to return to its target led the Fed to raise its federal funds rate by one-quarter of a percentage point in December, the first increase in seven years. In Europe, despite the consistent yet moderate growth during the past year, inflation remains close to zero and inflation expectations for the longer terms were revised downward. As a result, the ECB has adopted an even more accommodative monetary policy. Thus, toward the end of the period being surveyed, there was a divergence of monetary policies between the main economic blocs.
The housing market: An increase in home prices was renewed after some moderation during the previous half of the year. In addition, the number of transactions and the volume of new mortgages increased sharply during the period being surveyed and reached record levels. Even though the risk characteristics of the new mortgages remained low as a result of past steps taken by the Banking Supervision Department, the growth in the share of mortgages continues to be the main risk component in bank credit. The volume of building starts remained at a high level. The rate of increase in rents remained relatively stable.
Financial markets: Domestic share indexes have declined since August, in line with the global trend, accompanied by an increase in volatility against the background of declines in the stock markets of advanced economies. Yields increased in the short-term segment of the real and nominal yield curves and declined in the long-term segment. The spread between similar corporate and government bonds remained unchanged during the period being surveyed.
Fiscal developments: The government budget for 2015 was approved in November. In October, the government reduced the VAT rate by one percentage point. Tax revenues exceeded the forecast of the Research Department made at the beginning of the year by about NIS 6 billion. Tax revenues grew in real terms by 6.1 percent relative to 2014. Net of legislative changes and one-time revenues, total tax revenues rose by about 7.9 percent in real terms. The actual deficit was 2.15 percent of GDP (in terms of actual GDP), compared with 2.75 percent of GDP in the budget (in terms of actual GDP) and the ratio of public debt to GDP declined to 64.9 percent.
Forecasts of the Research Department: At the beginning of the second half of the year, the Research Department presented an optimistic forecast, based on the optimistic forecasts worldwide. Thus, the Research Department expected that inflation would return to within the target range within 12 months and that by the end of 2016 it would return to around the midpoint of the range, and also that the rate of growth in GDP would increase. During the second half of the year, the Research Department revised downward its growth forecasts for 2015 and 2016, following weaker than expected growth in the third quarter and a downward revision of forecasts of world trade. According to this forecast, inflation will be somewhat below the lower bound of the target range at the end of 2016 and the Bank of Israel interest rate will start to rise only in the fourth quarter of 2016.