The Monetary Committee decides on April 19, 2021 to keep the interest rate unchanged at 0.1 percent
- The Israeli economy is recovering at a rapid pace, following the exit from the third lockdown. The effectiveness of the vaccination program has led to a sharp decline in morbidity rates, and has allowed a broad relaxation of the limitations on activity.
- The available indicators regarding economic activity in March were at the highest level since the beginning of the crisis. There was also a marked increase in activity in those industries that were particularly hard-hit by the limitations.
- The broad unemployment rate declined in the first half of March, to 12 percent. Data for the end of March and for April are expected to indicate a further decline in the broad-definition unemployment rate. According to the Business Tendency Survey conducted by the Central Bureau of Statistics, there was a sharp increase in companies reporting difficulties in recruiting workers, together with a notable increase in reported job vacancies.
- The Research Department’s staff forecast projects that GDP will grow by 6.3 percent in 2021. The broad unemployment rate is expected to decline to 7.5 percent by the end of 2021. In 2022, growth of 5 percent is expected, so that the level of GDP in 2022 is expected to be only approximately 1.4 percent lower than the level that had been expected prior to the crisis. The unemployment rate in 2022 is expected to continue to decline, to about 6 percent in the fourth quarter of the year—a level that is still higher than the precrisis level.
- The inflation environment remains low, but a moderate upward trend continues. The CPI increased by 0.6 percent in March, following an increase of 0.3 percent in the February CPI—both higher than expected—and inflation in the past 12 months is 0.2 percent. Inflation expectations for the coming year from all sources increased, and are at the lower bound of the inflation target range. Medium- and long-term inflation expectations are anchored within the target range.
- Since the previous interest rate decision, the shekel strengthened by 1 percent in terms of the nominal effective exchange rate and against the euro, while it weakened by 0.4 percent against the dollar.
- The pace of issuance in the equity market remains high, and there was a sharp increase in capital raised in the venture capital industry in the first quarter. The credit market continues to function well, with stable and low interest rates, supported by a range of steps taken by the Bank of Israel and the Ministry of Finance. In February and March, for the first time since the crisis began, the average level of difficulty reported by companies in raising credit declined in all industries, other than hotels, and returned to the precrisis levels.
- The increase in the pace of vaccinations around the world is aiding the global economic recovery. The IMF revised its growth forecasts upward in all the main regions. World trade continues to grow, and its level is higher than it was prior to the crisis. The inflation rate increased in all the main regions, but the core indices remained lower than central banks’ targets. Monetary policy at the major central banks remains very accommodative.
The opening of the economy and the return to normal life in Israel are expected to support continued rapid growth in the coming year. However, there are still challenges to economic activity in view of the health risks in Israel and abroad. The crisis's adverse effects on the economy, particularly the labor market, are expected to be prolonged. The Committee will therefore continue to conduct a very accommodative monetary policy for a prolonged time, using a range of tools as necessary, including the interest rate tool, in order to support the attainment of the policy targets and the recovery of the economy from the crisis, and to ensure the continued orderly functioning of the financial markets.
Israel’s economy is recovering at a rapid pace following the exit from the third lockdown. The effectiveness of the vaccination program has led to a sharp decline in morbidity rates and has enabled a broader relaxation of the limitations on activity. The high vaccination rate among older age groups is reducing the risk of severe illness and a further wave of restrictions. Alongside this, there remains concern over the development of variants that are resistant to the vaccines or those that may cause more severe illness among the unvaccinated population. Such development poses a risk to the economy and to a return to normal routine.
The available indicators regarding economic activity in March show that economic activity is at its highest level since the beginning of the crisis in March of last year, and initial indicators show that this trend has strengthened further in April. An examination of activity in industries that were significantly impacted by the restrictions (restaurants, tourism and leisure services, and education) shows that in these industries as well, there was a significant increase in activity (Figure 4). Moreover, credit card expenditure data indicate that the total value of purchases during the exit from the third lockdown was higher than its long-term (2016–19) trend line. According to the Central Bureau of Statistics Business Tendency Survey, the aggregate net balance of the business sector continues to increase from its low point of the second lockdown (Figure 2). While the prolonged upward trend of services exports continues, and their level is higher than prior to the crisis, foreign trade data indicate that goods exports (excluding ships, aircraft, and diamonds, in dollars), which were volatile throughout the crisis, have trended downward in recent months (Figure 6). Data on goods imports (excluding ships, aircraft, and diamonds, in dollars) in March indicate a continued trend of accelerated growth (Figure 7).
Alongside the increase in economic activity, Labor Force Survey data for the first half of March indicate a decline in the broad unemployment rate to 12 percent (Figure 8). Data for the end of March and April are expected to indicate a further decline in unemployment. In addition, according to the Business Tendency Survey by the Central Bureau of Statistics, there was a sharp increase in companies reporting difficulty in recruiting workers (Figure 9). Alongside this, there was a marked increase in job vacancies reported (Figure 10). Despite the gradual return to employment, since some businesses have ceased to operate over the course of the year, and due to the remaining limitations and the implementation of efficiency and digitization measures that businesses have undertaken in the past year, it is expected to take a long time for the unemployment rate to return to its low precrisis levels. The government’s policy regarding employment may also have an impact in this context.
The Bank of Israel Research Department revised its macroeconomic forecast for the coming two years. Its assessment is that GDP will grow by 6.3 percent in 2021 (Figure 1). The level of GDP is expected to be higher than what was expected in the rapid vaccination scenario presented in the previous forecast. The broad unemployment rate is expected to decline to 7.5 percent of the labor force by the end of 2021. In 2022, GDP is expected to grow by 5 percent, so that the level of GDP in 2022 is expected to be only about 1.4 percent lower than the level expected before the crisis. The unemployment rate is expected to continue declining in 2022, to about 6 percent in the fourth quarter of the year, which is still higher than the precrisis rate. The debt to GDP ratio is expected to be 77 percent in each of the next two years.
The inflation environment remains low but continues to trend moderately upward. The CPI for March increased by 0.6 percent, following an increase of 0.3 percent in February—both higher than expected. Inflation in the past 12 months was 0.2 percent (0.2 percent net of energy and fruit and vegetables) (Figure 12). Against the background of the accommodative policy and the global inflation environment, inflation expectations for the coming year increased, and are around the lower bound of the target range (Figure 14). Medium- and long-term expectations are anchored within the target range (Figure 15).
Since the previous interest rate decision, the exchange rate has generally been stable. The shekel strengthened by 1 percent in terms of the nominal effective exchange rate and against the euro, and weakened by 0.4 percent against the dollar (Figure 16).
Home prices increased by 4 percent in the past 12 months (Figure 23), and investors’ share of total transactions increased. At the same time, the pace of increase in rental prices remained moderate. New mortgage volume in March 2021 was NIS 8.6 billion, further to the high mortgage volumes since the beginning of the year, alongside the Bank of Israel directive relaxing the prime rate limitations for new borrowers and those refinancing their mortgages going into effect (Figure 24).
Israel’s equity market continued to rally. The pace of new issuance in the equity market remains high, and there was a sharp increase in capital raised in the venture capital industry in the first quarter (Figures 21–22). Ten-year government bond yields were stable. Corporate bond spreads continued to narrow, and are close to their precrisis levels (Figure 20). The credit market continues to function well with stable and low interest rates, supported by a range of steps taken by the Bank of Israel and the Ministry of Finance. According to the Business Tendency Survey, in February and March, for the first time since the beginning of the crisis, the average level of businesses’ difficulty in obtaining credit declined, returning to precrisis levels in all industries except for hotels, where companies are still reporting relatively high levels of difficulty in obtaining financing (Figure 26).
The increase in the pace of vaccinations around the world is aiding the recovery of the global economy. The IMF revised its growth forecasts upward for all the main regions, with the global economy expected to grow by about 6 percent in 2021 (Figure 28). The OECD expects that at the end of 2021, the US will be the only G20 country where growth will reach, and even slightly surpass, the original growth path from 2019. Global output is expected to be about 3 percent lower than the precrisis forecast. World trade continues to grow, and is at a higher level than it was prior to the crisis (Figure 29). The global Purchasing Managers Index for March increased to a level that was last seen in 2018 (about 55 points), indicating a marked expansion of global activity in both the services and manufacturing components (Figure 30). In the capital markets, the upward trend in equity prices continued, with the major indices at record highs. Oil prices were volatile during the period, with a slight increase by the end of the period (Figure 32). Agricultural commodity and metal prices remained stable. The inflation rate increased in all the major blocs, but the core indices remained below central banks’ targets. There was an increase in short-term inflation expectations, which is expected to moderate as a result of the moderation of the base effect. Monetary policy at the major central banks remains very accommodative. The US is leading a significant economic recovery as a result of the rapid distribution of vaccinations, a reduction of restrictions, and the launch of a fiscal program of significant scope—about 8.5 percent of GDP—alongside a planned tax reform that, if it is implemented, is expected to have a global impact. The fiscal program is expected to have a positive effect on the growth rate and on the labor market in the US, and is expected to encourage the continuation of the upward trend in inflation. In Europe, there is an increase in morbidity rates that has led the major countries in the eurozone to announce renewed lockdowns that are expected to have an impact on GDP growth in the first quarter of the year. China’s economy is continuing its rapid recovery from the crisis. Retail sales and industrial production data indicate a sharp increase compared with the same months last year.
The minutes of the monetary discussions prior to this interest rate decision will be published on May 3, 2021. The next decision regarding the interest rate will be published at 16:00 on M