The Monetary Committee decides on April 16, 2018 to keep the interest rate unchanged at 0.1 percent
- The inflation environment remains below the target, although there are continued indications of some increase in it. In February and March, the CPI increased by a rate slightly higher than forecast, but expectations and most forecasts for one year remain below the target, while expectations for the medium and long terms are anchored within the target range.
- According to indicators of economic activity, it may be assessed that in the first quarter, the economy continued to grow at a solid pace, perhaps even higher than the potential growth rate. Exports are increasing, driven by services exports. The labor market remains tight, and the downward trend in the unemployment rate continues. Wages are continuing to increase, though at a rate that is lower than in the past.
- The data and forecasts regarding the global economy indicate that the improvement is becoming entrenched, but there are signs of a decline in momentum, and the risks to continued growth are increasing. Concerns over a “trade war” have increased, as have geopolitical risks. The Federal Reserve increased the federal funds rate, as expected, and is expected to raise it twice more this year.
- The exchange rate has not changed significantly since the last interest rate decision. At the beginning of the period, the shekel strengthened by about 2 percent in terms of the nominal effective exchange rate, and subsequently there was a depreciation by a similar rate.
- Housing market data continue to indicate a slowing of activity. The decline in the number of transactions continued, and in the past five months, home prices have declined by 2.4 percent. At the same time, there has been a significant decline in the number of building starts.
The Monetary Committee intends to maintain the accommodative policy as long as necessary in order to entrench the inflation environment within the target range. The Bank of Israel continues to monitor developments in inflation, the real economy, the financial markets, and the global economy, and will act to attain the monetary policy targets in accordance with such developments.
The inflation environment remains below the target, though some increase in it is apparent. The Consumer Price Index increased in February and March by a rate slightly higher than forecast (Figure 1 in the attached data file), and over the past 12 months, inflation was 0.2 percent. Inflation in nontradable goods prices continues to decline, while the inflation rate of tradable goods prices is becoming less negative (Figure 3). Since the previous interest rate decision, there has been a mixed trend in one-year inflation expectations from various sources, though they all remain below the target (Figure 4). Medium-term expectations derived from the capital market are stable (Figure 5), with second-year forward expectations slightly above the lower bound of the target range, and medium- and long-term expectations anchored within the range. Since the previous interest rate decision, there has been no significant change in the exchange rate. The shekel strengthened by 2 percent at the beginning of the period, and weakened by a similar amount thereafter (Figure 6).
Since the previous interest rate decision, yields on government bonds in Israel and abroad have declined, and the spread between the nominal yield on 10-year Israeli government bonds and the yield on similar bonds in the US remained stable (Figure 7). The real yield spreads between corporate and government bonds continued to increase moderately, but remain very low (Figure 8).
Economic activity continues to expand at a solid pace, which may even be higher than the potential growth rate (Figure 12). According to the second estimate of National Accounts data for the fourth quarter of 2017, the economy grew in the fourth quarter by 4.1 percent (seasonally adjusted, in annual terms). Indicators of activity in recent months permit the assessment that the growth rate in the first quarter of 2018 was similar. This can be seen in, for example, the Composite State of the Economy index, which increased by 0.4 percent in March (Figure 13), and the initial findings of the Companies Survey (Figure 14). Services exports are leading the growth of exports, but there has also been a slight improvement in goods exports. The labor market remains tight. The unemployment rate remains very low, and the participation rate and the employment rate remained at record highs (Figure 15); wages continue to increase, although there was some moderation in the rate of increase in recent months (Figure 16); and the ratio of job vacancies to unemployed persons is high, although growth of the job vacancy rate is moderating.
Housing market data continue to indicate a slowdown in activity. The increase in home prices has halted, and there was a decline of 2.4 percent in home prices in the last five months for which data have been published (Figure 9). The volume of transactions continues to decline, particularly transactions made by those upgrading their homes. During the course of 2017, there were declines in building starts and in building completions, though in the second half of the year there was an increase in building permits (Figure 10). Mortgage volume increased slightly after a prolonged decline, with a slight decrease in mortgage interest rates (Figure 11).
Data on the global economy indicate that the improvement is being entrenched. The OECD revised its growth forecast for the major economies upward, mainly due to the fiscal expansion in the US and the continued growth in global demand (Figure 17). However, various indices point to uncertainty, a weakening of momentum, and increased risk. There are growing concerns of a “trade war”, although the measures adopted thus far have a limited effect, and the sides are apparently trying to reach understandings. Geopolitical tensions have also increased. Tightening of financial conditions in the US pose further risk to the global economy. There were declines in equity markets, accompanied by high volatility (Figure 22). Most major central banks are continuing with accommodative monetary policies, and during the reviewed period, there was a slight increase in inflation, but it remains below the central bank targets (Figure 21). The US economy is close to full employment, and is expected to continue its strong growth against the background of the expansionary fiscal policy decided upon by the administration in recent months, which is expected to also lead to an increase in the deficit and in the debt. The Federal Reserve increased the federal funds rate as expected, by 25 basis points, in its most recent decision, and is expected to increase the rate twice more during 2018. In the eurozone, the relatively rapid growth rate continues. The ECB continued with its accommodative monetary policy. The expansion of the Japanese economy is continuing for the ninth consecutive quarter. Economic activity improved in emerging economies as well, but China was particularly impacted by uncertainty regarding the “trade war”. The price of oil resumed its increase against the background of increased demand and geopolitical risks (Figure 23).
The minutes of the monetary discussions prior to this interest rate decision will be published on April 30, 2018.
The next decision regarding the interest rate will be published at 16:00 on Monday, May 28, 2018.