The Monetary Committee decides on February 22, 2021 to keep the interest rate unchanged at 0.1 percent
- The economy is in the process of exiting the third lockdown, which, despite its duration, was less strict than the previous lockdowns and had a more moderate than expected impact on economic activity. The vaccination campaign is progressing rapidly but the spread of more contagious variants and the still high morbidity level are weighing on a return to strong economic activity.
- GDP contracted by 2.4 percent in 2020, and per capita GDP contracted by 4.1 percent, less severe than had been previously forecasted. Despite the second lockdown in October and the start of the third lockdown at the end of December, in the fourth quarter of 2020 GDP grew by 6.3 percent (2.9 percent net of the effect of vehicle imports). Central Bureau of Statistics real-time surveys conducted in early January indicate an encouraging increase in the share of companies that believe they can continue to exist under the current conditions for more than half a year, with firms’ resilience increasing the larger they are.
- The broad unemployment rate increased during the third lockdown, to about 20 percent in the second half of January, after having declined to about 13 percent during the period between the lockdowns. It is clear that the unemployment rate during the lockdowns increases mainly in the industries that are significantly impacted by social distancing requirements, such as the hospitality and food services, art and leisure, and education industries.
- The inflation environment remains low but continues to trend upward moderately. The CPI for January declined by 0.1 percent, following an identical decline in December, and the inflation rate in the past 12 months was -0.4 percent. In view of the accommodative monetary policy and the global inflation environment, inflation expectations for the coming year from all sources increased, and are around the lower bound of the target range. Expectations derived from the capital market for the first and second years increased markedly. The expectations for medium and long terms remain anchored within the target range.
- From the previous interest rate decision until January 14, the shekel strengthened by 3.2 percent in terms of the nominal effective exchange rate. Following the Bank of Israel’s announcement on that date regarding the amount of intervention to be executed in 2021, the shekel weakened by 5.2 percent. This trend is expected to support export performance during the exit from the crisis, and a return of inflation to the target range.
- The Israeli equity market showed large price increases relative to markets abroad. The credit market continues to function with stable and low interest rates, supported by a range of steps taken by the Bank of Israel and the Ministry of Finance. However, according to the Business Tendency Survey, the difficulty in raising bank credit reported by companies—particularly small ones—is still greater than it was prior to the crisis.
- The global economy continues to recover against the background of the decline in the scope of morbidity around the world. The IMF revised its growth forecasts upward, with the global economy expected to grow by 5.5 percent in 2021. Fourth quarter GDP data surprised to the upside in most countries. However, morbidity levels that remained high in some countries, as well as the difficulty in moving forward with vaccinations, are expected to slow the pace of recovery.
The fast pace of the inoculation process in Israel increases the optimism regarding a rapid return of the economy to a path of growth in the coming year. However, the risks to economic activity remain high—mainly in view of the risk of additional morbidity waves due to the spread of the various mutations—and the adverse impact on the economy, and particularly on the labor market, is expected to be prolonged. The Committee will therefore continue to utilize a range of tools in order to increase the extent of the monetary policy accommodation and to ensure the continued orderly functioning of the financial markets. The Committee will expand the use of the existing tools, including the interest rate tool, and will operate additional ones, to the extent that it assesses that it is necessary in order to achieve its monetary policy goals and to moderate the adverse economic impact resulting from the crisis.
The economy is in the process of exiting the third lockdown that began at the end of 2020 and continued until the first week of February. This lockdown was the longest of the lockdowns thus far, but despite its duration, it was less stringent and its impact on economic activity was more moderate than expected and less than the previous lockdowns. The inoculation campaign is progressing rapidly and the vaccination rate of the population in Israel is the highest in the world. In contrast, the spread of more contagious variants and the high morbidity level are weighing on a return to enhanced economic activity.
The available indicators regarding economic activity in December and January show a more moderate adverse impact to economic activity than during the previous lockdowns. However, there continues to be a marked variance in the impact between different industries, with some suffering a negative impact from the restrictions and social distancing requirements, in contrast to others that were not negatively impacted or that were able to adapt. This is seen, for example, in credit card expenditure data by industry (Figure 5). Google data on mobility to workplaces (Figure 6) declined at a slower rate than in previous lockdowns. According to the Central Bureau of Statistics Business Tendency Survey, the overall net balance of the business sector continues to increase slowly from the low point during the second lockdown (Figure 3). Foreign trade data indicate that goods exports (excluding ships, aircraft, and diamonds, in dollars) declined slightly in December and January, but remain similar to their precrisis levels. Goods imports (excluding ships, aircraft and diamonds in dollars) are in a significant upward trend that encompasses all components of imports.
According to the first reading of National Accounts data for the fourth quarter, GDP contracted by 2.4 percent in 2020, and per capita GDP contracted by 4.1 percent, less than the contraction that had been forecast. Despite the second lockdown in October and the start of the third lockdown at the end of December, GDP grew by 6.3 percent in the fourth quarter of 2020 (seasonally adjusted, in annual terms, Figure 1). Fourth-quarter growth was markedly affected by vehicle imports being brought forward in view of expected changes in taxation. Net of this component, based on the Research Department’s assessment, fourth quarter growth was 2.9 percent. However, over the year as a whole, the volatility of vehicle imports (which occurred at the end of the previous year as well) did not have a significant impact on annual growth. Private consumption increased by about 18 percent in the fourth quarter, although over the year as a whole it contracted by more than 9 percent and constitutes the most notable contribution to the contraction of economic activity in 2020 (Figure 2).
Although the contraction of GDP was lower than expected—2.4 percent in 2020—labor market data reflect the real magnitude of the crisis, and the uneven distribution of its impact on various wage levels. The broad unemployment rate increased during the third lockdown, to about 20 percent in the second half of January, after having declined to about 13 percent in the period between the lockdowns (Figure 9). An industry-by-industry examination shows that the unemployment rate during lockdowns increases in the industries that are notably impacted by social distancing requirements, particularly the hospitality and food services, art and leisure, and education industries (Figure 10). Real-time surveys conducted by the Central Bureau of Statistics in early January indicate an encouraging increase in the share of companies that are of the view that they can continue to exist under the current conditions for more than half a year, with firms’ resilience increasing the larger they are.
The inflation environment remains low but continues to trend moderately upward. The CPI for January declined by 0.1 percent, following an identical rate of decline in December, and inflation in the past 12 months was -0.4 percent (0.1 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 from all sources increased, and are around the lower bound of the target range. In particular, expectations derived from the capital market for the first year increased from approximately 0.5 percent to 1.3 percent (Figure 14). Medium-term inflation expectations are within the target range, and long-term expectations remained anchored close to the midpoint of the target range (Figure 15).
From the previous Monetary Committee decision until January 14, the shekel strengthened by 3.2 percent in terms of the nominal effective exchange rate. Following the Bank of Israel’s announcement of the amount of intervention to be executed in 2021, the shekel weakened by 5.2 percent. During the period as a whole, the shekel weakened by about 1.8 percent in terms of the nominal effective exchange rate, by 2 percent against the US dollar, and by about 0.6 percent against the euro (Figure 16). This trend is expected to support export performance in the exit from the crisis, and a return of inflation to within the target range.
Home prices increased by 4 percent in the past year (Figure 21), while the increase in rental prices moderated. The number of home purchases in recent months increased to a higher level than the precrisis level for all purchaser types. However, the total number of transactions for all of 2020 was similar to the 2019 level. New mortgage volume in January was NIS 6.4 billion, further to the high mortgage volumes in 2020 (Figure 22).
There were relatively large price increases in Israel’s equity market, compared with markets abroad, since the previous interest rate decision (Figure 32), in contrast to the trend of the last year. There were notable price increases in the technology and banking sectors. Government bond yields increased for most maturities, with the curves becoming steeper, similar to the global trend. Corporate bond spreads remain low. The credit market continues to function with stable and low interest rates, supported by a range of steps taken by the Bank of Israel and the Ministry of Finance. However, according to the Business Tendency Survey, despite the decline in the difficulty of raising credit since the initial stage of the crisis, it remains high compared to before the crisis, particularly among small businesses (Figure 23).
The global economy continues to recover in view of the decline in the scope of morbidity around the world. Fourth quarter GDP data surprised to the upside in most countries. However, morbidity levels in some countries remained high, and the expansions of lockdowns and restrictions, as well as the difficulty in moving forward with vaccination campaigns, are expected to slow the pace of recovery in those countries. The IMF revised its growth forecasts upward, with the global economy expected to grow by 5.5 percent in 2021 (Figure 26). World trade continues to grow (Figure 27). Purchasing managers indices for January continued to indicate expansion of global activity in both the services and manufacturing components (Figure 28). Equity prices continued to increase, and the rally in oil and other commodity prices continued (Figure 30). Short-term inflation is expected to remain below central banks’ targets, although there was an increase in longer-term expectations, particularly in the US. The monetary policies of the major central banks remain very accommodative. In the US, morbidity remains high but is in a downward trend, and the vaccination campaign accelerated during the recent period. GDP grew by 4 percent during the fourth quarter, and is 2.5 percent lower than its level in the fourth quarter of 2019. Sentiment indices point to a continued recovery in the beginning of 2021. In Europe, the high morbidity and continued lockdowns led to a contraction of GDP. First quarter growth is expected to be between near-zero and negative in the major countries, in view of most European countries so far having maintained a high level of restrictions and the pace of inoculating the population being relatively slow. The Japanese economy grew by about 3 percent in the fourth quarter, surpassing expectations, and further to the growth of the previous quarter, in view of strong export data. The rapid economic recovery in China continues.
The minutes of the monetary discussions prior to this interest rate decision will be published on March 8, 2021. The next decision regarding the interest rate will be published at 16:00 on Monday, April 19, 2021, followed by a press briefing by the Governor.