The Monetary Committee decides on February 21, 2022 to keep the interest rate unchanged at 0.1 percent
- The ongoing economic activity in Israel continues at a high level alongside the COVID-19 pandemic. The risk of further morbidity cycles remains, and is leading to continued uncertainty regarding the expected intensity of economic activity.
- Inflation in Israel is around the upper bound of the target range, and was 3.1 percent in the past 12 months. Inflation expectations for the coming year from most sources increased, but are within the target range, as are expectations for the medium and long terms.
- Since the previous monetary policy decision, the shekel has weakened by 3.3 percent against the US dollar, by 3.4 percent in terms of the nominal effective exchange rate, and by 3.5 percent against the euro.
- According to National Accounts data, GDP grew by 8.1 percent in 2021, beyond the forecast growth, and per capita GDP grew by 6.3 percent. For the first time since the start of the COVID-19 crisis, the GDP level crossed the precrisis trendline.
- The upward trend in home prices accelerated in recent months, with prices rising by 11.3 percent in the past 12 months, a significantly higher pace than in previous years.
- The Omicron variant’s impact on the global economy has been relatively moderate, and the recovery trend in economic activity continues. The interruptions in the global production chains continue, although with slightly less intensity.
- The inflation indices in many countries are significantly higher than the central bank targets. Monetary tightening around the world therefore continues.
The Israeli economy recorded high growth alongside the COVID-19 virus, and various indicators point to continued strong activity. The Committee’s assessment therefore is that in the coming months, conditions will allow for the start of a gradual process of raising the interest rate in line with the path of inflation and the pace of growth and employment, in order to continue supporting the achievement of the monetary policy goals and to ensure the continued proper functioning of the financial markets.
The ongoing economic activity in Israel continues at a high level alongside the COVID-19 pandemic and the cyclical nature of the waves of morbidity. This has been possible, in part, thanks to the adaptation of most industries to functioning alongside the pandemic. The fifth wave is in a clear decline in Israel. However, the risks of further morbidity cycles and the parallel development of new strains of the virus in the future remain, and are leading to continued uncertainty regarding the expected intensity of economic activity in the short and medium term.
Since the previous interest rate decision, the CPI increased by 0.3 percent in December and by 0.2 percent in January. Inflation in Israel is around the upper bound of the target range, and was 3.1 percent in the past 12 months (Figure 1). Net of energy and fruits and vegetables, inflation is 2.7 percent, and net the effects of taxation and regulation, it is 2.4 percent (Figure 2). The annual pace of inflation in both the nontradable and the tradable components increased in recent months (Figure 3). Inflation expectations for the coming year from most sources increased, but are within the target range (Figure 4). The professional forecasters project that inflation will remain around the upper bound of the target range in the coming months, and is then expected to decline toward the midpoint of the range. In February, the government announced a number of measures to deal with the cost of living, and according to an analysis by the Bank of Israel Research Department, they are expected to directly contribute to a decline of about 0.2 percentage points in inflation. Expectations for the second year derived from the capital market increased during the reviewed period to above the target range, but expectations from the third year onward are within the target range. Expectations for the longer terms declined compared to those published with the previous decision, and are around the midpoint of the target range (Figure 5). The Monetary Committee continues to closely monitor these developments, and maintains its assessment that there is no concern of an inflationary outbreak. Since the previous monetary policy decision, the shekel has weakened by 3.3 percent against the US dollar, by 3.4 percent in terms of the nominal effective exchange rate, and by 3.5 percent against the euro (Figure 6).
Despite the high morbidity level and the increased number of people in isolation, economic activity continues apace in most fields. According to the first estimate of National Accounts data for the fourth quarter, GDP in 2021 grew by 8.1 percent—exceeding the forecast growth—and per capita GDP grew by 6.3 percent. In the fourth quarter, GDP jumped by 16.6 percent (seasonally adjusted in annual terms; Figure 13). For the first time since the start of the COVID-19 crisis, the GDP level crossed the precrisis trendline (Figure 15). Strong fourth-quarter growth was registered in all areas of GDP. In parallel, the Central Bureau of Statistics revised 2021 third-quarter growth upward from 2.7 percent to 6.7 percent.
The aggregate balance of the Central Bureau of Statistics Business Tendency Survey for January remains in positive territory despite the declines in recent months (Figure 16). Total credit card purchases in January and February remained similar to the previous two months, and despite the increase in morbidity rates, there was no significant decline in overall consumption (Figure 17). At the beginning of the Omicron wave, there were some declines in purchases in industries that were hard bit by the crisis, but it is clear that the trend of recovery in those industries is continuing. In view of the continuing global supply chain difficulties, the intensity of the equipment and raw materials constraint reported by companies remained high. Goods exports (excluding ships, aircraft, and diamonds) remain higher than before the crisis, and services exports remain very high (Figure 18). Goods imports are also high in all components (Figure 19).
Labor market data for January indicate stability in the general employment level, and are not far from the precrisis levels. Even at the peak of the Omicron wave, the employment indices remained stable in the second half of January. However, there was a decline in actual labor inputs due to the high number of employees in isolation. The average number of employees who were absent from their workplace for an entire week in January was about 70,000 higher than the December average. The broad unemployment rate declined to 5.6 percent in January (Figure 20). The adjusted employment rate remained virtually unchanged, at 60.2 percent, reflecting a gap of about 65,000 employees (0.9 percentage points) from the average employment rate in 2019 (Figure 21). The number of job vacancies remained high in January (Figure 22). Despite the fact that the general employment environment is close to its precrisis state, there has been a change in the industry mix of employment relative to the situation in 2019. In recent months, most business sector industries have remained in states of underemployment, while employment in the healthcare, information, and communications industries has expanded beyond the employment trends that were expected prior to the crisis (Figure 23). The average wage in the economy increased in line with the precrisis trends, as did the average wage after neutralizing the effect of the employee composition that was typical of the COVID-19 period. However, there is some acceleration in the pace of increase in wages in the construction and information and communications industries.
The upward trend in home prices accelerated in recent months, with prices rising by 11.3 percent in the past 12 months (Figure 9), a significantly higher pace than in previous years. Investors increased the pace of their purchases in October and November, prior to the increase in the purchase tax, and decreased their purchases thereafter (Figure 11).The volume of new mortgages taken out in January declined relative to data from the end of 2021, but remained high by historical comparison (Figure 10). Alongside this, the annual increase in rents remained relatively moderate.
There were declines in equity prices on the domestic capital market, similar to the global trend, alongside a more moderate increase in government bond yields. Corporate bond spreads also increased, but remained at low levels. According to the Central Bureau of Statistics Business Tendency Survey, financing constraints among businesses of various sizes remained similar to precrisis levels. However, in December–January, in view of the spread of the Omicron morbidity wave, there was some increase reported in financing constraints among small businesses (Figure 12).
The Omicron variant’s impact on the global economy has been relatively moderate, and the recovery trend in economic activity continues. Many countries are easing the restrictions they have imposed, and some are even removing them almost completely. The interruptions in the global production chains continue, although with slightly less intensity. The International Monetary Fund revised its global growth forecast downward, and expects growth of 4.4 percent in 2022 (Figure 27). The global purchasing managers index declined in view of the outbreak of the Omicron variant, but remains at a level indicating economic expansion (Figure 29). The volume of world trade increased slightly, and is at a very high level (Figure 28). Equity indices in the advanced economies recorded price declines with high volatility. There was an increase in government bond yields in view of the increase in expectations of monetary tightening. Oil and other commodity prices increased in view of the tension in eastern Europe. The global inflation environment continues to increase. The inflation indices in most countries are higher than the central bank targets, and in some of them, core inflation is also above the target. Monetary tightening around the world therefore continues. In the US, GDP grew by a rate higher than expected in the fourth quarter, and the labor market remains tight. The Federal Reserve left the federal funds rate unchanged, but continued to cut the amounts to be purchased in its government bond and mortgage-backed securities purchasing program, so that the programs are expected to draw to a close in March. The Fed also announced its intention to reduce its balance sheet and to begin a process of raising the interest rate in view of the further increase in the inflation rate (in CPI terms) to an annual rate of 7.5 percent. In Europe, the increase in annual inflation continued, to 5.1 percent. The European Central Bank left its interest rate unchanged, but there are increasing assessments in the eurozone that the ECB will begin raising its interest rate later in the year. Inflation in the UK continued to increase, reaching 5.5 percent. The Bank of England again increased its interest rate to 0.5 percent. In a number of other countries where inflation is above the central bank target, there were also increases in the interest rates (Figure 33).
The minutes of the monetary discussions prior to this interest rate decision will be published on March 7, 2022. The next decision regarding the interest rate will be published at 16:00 on Monday, April 11, 2022, followed by a press briefing with the Governor.