Remarks by the Governor of the Bank of Israel at the press briefing on monetary policy held today at the Bank of Israel
Yesterday and today, the Monetary Committee held discussions at the Bank of Israel in order to decide on monetary policy. Since our previous policy decision, at the end of May, we have again experienced the coronavirus’s vicissitudes. It remains difficult to assess the risk posed by the current variant given the high rate of vaccination amongst the population. In particular, we do not know if the increase in morbidity will be accompanied by a significant increase in the number of very ill and hospitalized patients and if it will compel the government to impose substantial limitations again on economic activity.
Since the exit from the third lockdown, and the easing of the limitations, the economic recovery has reached industries that were markedly adversely impacted by the limitations. In April, turnover in the principal economic sectors increased above the trend that had originally been expected just before the crisis. The current account surplus stabilized at a high level in the first months of 2021. This was due to strong activity in business services exports and despite a rapid increase in goods imports, which were impacted primarily by the imports of consumer goods and raw materials. In the Business Tendency Survey, companies reported an increase in constraints with regard to equipment and raw materials, and it could be that these limitations will be seen in a slowing of manufacturing exports in the coming months. In general, the business sector is recovering, though at the same time we still see some negative impact on small businesses. In addition, in industries that are dependent on tourism from abroad, activity remains very low, and the spread of COVID-19 is a risk to continued recovery, particularly in these industries.
With regard to the labor market, the employment rate continues to increase. Labor Force Survey data for the first half of June that were published today indicate an additional decline in the broad unemployment rate to 9.5 percent. Alongside that, some of the data point to difficulties in the labor market’s recovery process: the number of job vacancies continues to increase and their share of total posts remains high. We expect that the positive momentum in the return to employment will continue, even if at a more moderate pace. Consequently, the labor market is still far from full recovery, and it seems that the return to an unemployment rate similar to the low pre-crisis levels will take a prolonged time. Therefore, it is important to implement professional training for population groups that have been particularly adversely impacted.
According to the Research Department’s updated macroeconomic staff forecast that we published today, GDP is expected to grow by 5.5 percent in 2021 and by 6 percent in 2022. GDP growth in 2021 is expected to be more moderate than the Research Department’s previous forecast, while in 2022 it is expected to be higher. Based on this forecast, the deviation of GDP from the pre-crisis trend is expected to nearly close by the end of next year. Inflation is expected to remain within the target range, at 1.7 percent in 2021 and 1.2 percent in 2022. The broad unemployment rate is expected to continue to decline throughout the period, to 5.5 percent at the end of 2022. In terms of risks to the forecast, the fiscal uncertainty decreased, and will decline even further when the State budget is passed. However, the epidemiological risk remains, as we have all been seeing with recent days’ developments. In addition, there is uncertainty regarding inflation abroad in the coming period, and its impact on inflation in Israel.
The inflation environment in Israel continues to increase against the background of the economic recovery worldwide and the increase in the global inflation environment. Following the publication of the CPI for May, inflation returned to within the target range, for the first time since the middle of 2019. Inflation expectations for the coming year derived from the capital market increased and are at the middle of the target range, and inflation expectations for medium and long terms declined somewhat but remain anchored at the center of the target range. The Monetary Committee is following these developments closely, and is of the view that there is no concern of an outbreak of inflation.
In terms of the foreign exchange market, the announcement of the program to purchase $30 billion that we published in January of this year, at the height of the crisis, was a special plan for a very special situation, which supported the economy’s dealing with the economic ramifications of the COVID-19 crisis. Since January, the state of the pandemic in the world in general, and in Israel in particular, has been improving, and the economy is recovering at a solid pace, the employment situation is improving, and the inflation rate has returned to the target range. As I have said on previous occasions, I would like to reiterate that we are certainly not limited to a maximum intervention of $30 billion for this year—when the program ends, the Bank will continue to act in the foreign exchange market as needed, taking economic activity into account.
Financial markets in Israel continue to function in an orderly manner. Government bond yields remained at the same level since the previous interest rate decision, and corporate bond spreads are at their pre-crisis level. The credit market continues to function well, with stable and low interest rates. The Business Tendency Survey conducted by the Central Bureau of Statistics indicates that the financing difficulties among large and medium-sized businesses returned to their pre-crisis levels. Among small businesses, we see a further improvement, but the level of difficulty in receiving credit remains slightly high compared with 2019.
The global economy continues to improve, as the number of vaccinated people worldwide increases. This development is helping to drive the economy in Israel, as we are a small and open economy. International investment houses revised upward their assessment of global growth expected in 2021. The forecasts were revised against the background of the expansionary fiscal plan approved in the US and the increase in vaccination rates worldwide, alongside the world’s adjustment to carrying out economic activity even with social distancing limitations. In addition, world trade is recovering and trade volumes increased in recent months. The global Purchasing Managers Index also continues to increase. The services sector in the Index is higher than that of the manufacturing sector for the first time since the outbreak of the crisis, and is an indication of the changes through which the economy is going. Equity indices are at record highs, albeit the rate of price increases in the past period were more moderate. In our assessment, the pricing of some financial assets around the world does not necessarily reflect the range of risks. In terms of monetary policy and inflation worldwide, the inflation environment continues to rise; and similar to Israel, there are slight declines in long-term inflation expectations. In a small number of markets, mostly developing economies, in which inflationary pressures have been strongest, there were interest rate increases. With that, the monetary policy of major central banks worldwide remained very accommodative.
At the end of the discussions, the Monetary Committee decided to keep the interest rate unchanged. In addition, the Committee decided to end the program providing long-term loans to the banking system against credit extended to small and micro businesses, on October 1, 2021 or when the plan utilizes NIS 40 billion. We are constantly examining market conditions and continue to operate the other tools set for the crisis, as needed. In this way, the accommodative monetary policy will continue to accompany the Israeli economy’s exit from the economic crisis.
In conclusion, and beyond today’s monetary policy decision, I would like to remind us all that the exit from the crisis returns us to the important challenges facing the economy: how to increase productivity and bring additional population groups into the circle of quality employment. This is the time to put into action the structural reforms required for the coming decades. The plan that we formulated for the government to accelerate the economy and to increase productivity is made up of four main strategic activity channels: developing human capital, investment in infrastructure, developing the financial eco-system, and reducing bureaucracy and promoting digitization in the public sector. The time to advance these important investments and reforms is now. Financing these important steps will require working to reduce the structural deficit and using a judicious mix of funding sources based on the government’s priorities while maintaining fiscal responsibility.