Good afternoon.

Yesterday and today, the Monetary Committee held discussions at the Bank of Israel in order to decide on monetary policy. It appears that we are at the beginning of the end of the fourth wave of COVID-19 morbidity. So far, we have made it through this wave without a lockdown or severe limitations on activity, which has prevented a marked adverse impact on the economy. Businesses are reporting a better situation, and exports and imports remain at very high levels. In recent months, even the “proximity industries”, the industries that were hardest hit by the crisis, posted growth in credit card purchases by the public. However, while with the exit from the third wave it appeared that the economy would exit the crisis smoothly, the fourth wave has shown us an increasing probability of cyclicality in the development of morbidity and the spread of the virus in the medium term as well.

Israel’s economy is growing at an even faster pace than had been estimated until recently. We see this as well in the upward revisions of data on activity and of the forecasts, as well as in the notable revision by the Central Bureau of Statistics in historical growth data, which indicates a higher growth potential for the economy. This is a significant development at the macro level, and it can be asked if we can succeed in persisting over time at these growth levels that are close to 4 percent per year. The potential growth rate will be affected by various developments such as the continued development of high tech, the improvement of human capital and productivity, and the integration of population groups into the labor market.

The labor market also continues its trend of improvement, though at a slightly slower pace. The decline in unemployment since the exit from the third lockdown continues, and the employment rate is increasing. Alongside this, there has been an increase in job vacancies in view of the rapid growth of GDP, a phenomenon seen in other advanced economies as well as in Israel. Labor market frictions are leading to the job vacancies being filled at a relatively slow pace, among other things in view of the difficulty in the professional training process. Therefore, it may be that at the end of the process we will encounter an equilibrium of a structural unemployment rate that is higher than what there was before the crisis.

The Bank of Israel Research Department published an updated macroeconomic forecast today. According to the forecast, GDP will grow by 7 percent in 2021, a higher rate than in the previous forecast. In 2022, GDP is expected to grow by 5.5 percent. The inflation rate is also expected to continue to increase this year, but to remain within the target range and total 2.5 percent at the end of 2021. As some of the factors in the increase in inflation are apparently transitory, as I will explain further on, inflation is expected to decline to 1.6 percent at the end of 2022. The broad unemployment rate is expected to continue declining over the course of the period even more than had been assessed in the previous forecast and to reach 5.2 percent at the end of 2022. The main risk to the forecast is the possibility of additional waves of morbidity that will require severe limitations on activity. Such a scenario would be expected to reduce growth by about one percentage point in 2022. Additional risks to the forecast are the uncertainty about inflation abroad in the coming period, and whether supply difficulties are liable to continue longer than expected. In contrast, the fiscal uncertainty has declined, and will decrease even further after the government budget is approved.

After a long period in which central banks worldwide focused on stabilizing financial markets, controlling the crisis, and supporting economic activity, the issue of inflation is returning and becoming the main issue with which we and monetary policy makers around the world are dealing. The big question in this regard is, how much of the inflation is transitory and how much is expected to remain with us for a prolonged time?

The recovery of the global economy, the removal of the limitations, and growth in disposable income brought with them notable waves of demand. In parallel, the supply side is recovering more slowly and to date has not yet fully recuperated. As a result, we are seeing disruptions in economic activity, accompanied by an increase in energy prices and delays in various production and supply chains—delays that could reasonably be presumed to be transitory. These two processes—sharp growth in demand and difficulties on the supply side—naturally lead to inflationary pressures worldwide, and to a lesser extent in Israel as well. It is important to emphasize that their magnitude and the extent to which they will last are still not clear.

Looking forward as well, 1-year inflation expectations are within the target range. There is a gap in expectations for this period between those derived from the capital market and those of the banks and forecasters, which are lower. The gap reflects, among other things, the issue of the extent of how transitory this inflation is. Looking further ahead, inflation expectations for longer terms derived from the market continue to be anchored in the middle of the target range. I will sum this up by noting that the inflation environment in Israel has in fact increased, but it is markedly lower than in the rest of the world and is within the target range. It is important to emphasize that this is not an outbreak of inflation, but we are of course following developments all the time. These all enable us to be patient.

The process of exiting the crisis focuses us on dealing with additional economic challenges and issues that are different from those we dealt with in the past year and a half of the crisis. To some extent, these are preferable to those we dealt with at the height of the crisis.

In fact, much time has passed since we stood here and announced the first set of monetary steps that we operated in order to make it easier for the public and to help in dealing with the health and economic crisis that we faced. Around the world, and in Israel in particular, there is progress in the process of learning about what we called “economic life alongside the virus”. Together with the exiting process worldwide, some central banks have begun to gradually decrease the monetary accommodation they have been carrying out—some in actuality, and some just in signaling their future intentions. We have also stopped some of the accommodative steps we put into action, those that actively supported the credit market, as it is functioning in an orderly fashion. The additional tools that we operated in the bond market are expected to reach an end in the coming months. This is of course so long as we will not find ourselves in a stress scenario or other situation requiring immediate action. Thus, in effect, we have already been in a tapering process for some time.

As far as the foreign exchange market, as I have already noted in previous opportunities, I reiterate that we are not limited to a maximum intervention of $30 billion this year. When the Bank’s program ends, it will act in the foreign exchange market as needed, taking economic activity into account.

As a small and open economy, we are constantly looking at the activity in the rest of the world. We see that the global economy is continuing its trend of improvement and the percentage of vaccinated people continues to grow. It can be seen that world trade is recovering but at the same time it appears that there are some difficulties in the ability to conduct sound economic activity, and it is plausible that they will stay with us going forward for some period. Thus, for example, we saw some difficulties in export activity in China as well as in seaports on the US west coast, which impact on the global supply chain. Oil and gas prices have increased sharply recently, there was some correction in prices on major equity market indices worldwide, and we have seen an increase in volatility. As I have said in the past, in our assessment, the pricing of some financial assets worldwide may not adequately reflect the range of existing risks. Investment banks’ global growth forecasts essentially did not change, and the forecast is for solid growth going forward as well, but the expectation for activity in specific blocks does change in view of morbidity and economic developments in each one.

These were the main issues that we kept in mind in recent days as we held the Committee’s discussions. At the end of the discussions the Committee decided to keep the interest rate unchanged, and to end the quantitative easing in the bond market in the coming months. We are constantly examining market conditions and continue to accompany the Israeli economy’s exit from the economic crisis.

In concluding, I would like to say something on behalf of the Monetary Committee, and me personally, to a dear man, a Committee member for the past decade who is stepping down from his work on the Committee today—Prof. Reuben Gronau. Reuben joined the Monetary Committee on the day it was founded about a decade ago, and was one of its first three representatives from among the public. Reuben was a professional and significant anchor in the many decisions made by the Committee. In the comprehensive discussions held by the Committee, he challenged and clarified and contributed numerous and important insights. Reuben also did this together with the other Committee members in moments of truth, when the Committee had to operate significant policy tools, some of them unprecedented, to support the economy’s handling of the COVID-19 crisis, while displaying creativity and round the clock work.

Thank you.​