The Monetary Committee decides on February 25, 2019 to keep the interest rate unchanged at 0.25 percent
- The inflation environment remained near the lower bound of the target range. After the annual inflation rate declined below the target range in December, it returned above the lower bound in January, and in the coming months it is expected to hover near it. One-year expectations and forecasts from the various sources are around the lower bound of the target, while medium-term and long-term expectations increased slightly toward the midpoint of the target.
- In the fourth quarter of 2018, the economy returned to a growth rate that is in line with the long term pace, after slowing in the second and third quarters of 2018. Growth was driven by private consumption, while investment in residential construction has continued to contract for several quarters and goods exports remain sluggish. In recent months, the unemployment rate increased slightly, and the job vacancy rate declined, but the labor market remains tight and supports the assessment that the economy is in a full employment environment. In particular, wages continue to rise, led by the business sector and across all industries.
- The global macroeconomic picture continues to point to a decline in both the growth and inflation rates. The main risks include the slowdown in Europe, an escalation of the trade war, and Brexit. The IMF again revised its growth forecast downward for most regions, particularly Europe. Equity indices recovered, in light of the expected halt in the process of monetary contraction, and renewed optimism regarding US-China trade negotiations.
- Since the last interest rate decision, the shekel strengthened by 2 percent in nominal effective exchange rate terms. If the appreciation continues, it could delay the inflation rate’s rise toward the midpoint of the target.
The Committee assesses that the rising path of the interest rate in the future will be gradual and cautious, in a manner that supports a process at the end of which inflation will stabilize around the midpoint of the target range, and that supports economic activity. 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 is near the lower bound of the target range. The CPI for January declined by only 0.1 percent, a more moderate decrease than had been expected, and the inflation rate for the preceding 12 months returned to above the lower bound of the target, at 1.2 percent (Figure 1 in the attached file of figures), a level similar to that of recent months. The 12-month CPI excluding prices of energy, fruit and vegetables, and administrative price changes remains slightly lower (Figure 2). Inflation in nontradables, an approximation of the domestic component of inflation, continued to increase, reaching approximately 2 percent, while inflation in tradables continued to decline, and has turned negative in the past two months (Figure 3). In the coming months, inflation is expected to range around the lower bound of the target, and 1-year expectations and forecasts from the various sources are hovering around it (Figure 4). Since the previous interest rate decision, medium-term and long-term expectations have increased slightly toward the midpoint of the target (Figure 5). The shekel appreciated by approximately 2 percent in nominal effective exchange rate terms since the previous interest rate decision (Figure 6).
Equity indices in Israel have increased significantly since the last interest rate decision, after marked declines in the final two months of 2018 (Figure 7), in line with major equity indices worldwide (Figure 25). However, government bond yields declined more sharply than those in Europe and in the US (Figure 8). The yield spreads between corporate bonds and comparable government bonds narrowed slightly (Figure 9).
Based on the initial estimate of National Accounts data by the Central Bureau of Statistics, the economy returned to growth in the fourth quarter of 2018 at a pace in line with the long-term rate, following slower growth in the second and third quarters of 2018 (Figure 12). GDP grew by 3.1 percent (in annual terms), with the growth driven by private consumption. There was an increase in investment in most of the principal industries, except for investment in residential construction that continued to decline, and exports (excluding diamonds and startups) grew due to exports of services, while exports of goods remained sluggish (Figure 14). Labor market data indicate that it remains tight—the unemployment rate remains low, the employment rate is stable at a record high level (Figure 15), and wages continue to rise across all industries, led by the business sector (Figures 16 and 17). These factors support the assessment that the economy is in a full employment environment. The growth in imports also indicates that the supply constraint is limiting growth. Although in recent months the unemployment rate increased slightly and the job vacancy rate declined somewhat, it is too early to determine whether these point to the beginning of a change in trend.
Home prices declined by 1.4 percent in 2018, even though the most recent monthly figure showed an increase of 0.2 percent (Figure 10). The number of transactions continued to increase, particularly among first-time home buyers, notwithstanding the prolonged decline in the scope of residential construction. Mortgage volume continues to expand, and mortgage interest rates continue to rise moderately (Figure 11).
The global macroeconomic picture continues to indicate a decline in both the growth and inflation rates. The main risks include a slowdown in Europe, an escalation of the trade war, and Brexit. The IMF revised its growth forecast downward again for most regions, particularly for Europe (Figure 18). The moderation in world trade continues, led by advanced economies (Figure 19). However, the IMF kept its 2019 world trade growth forecast unchanged and slightly reduced its 2020 forecast. Equity indices recovered (Figure 20), in light of the change in tone at central banks, the expected halt in the process of monetary contraction, and renewed optimism regarding US-China trade negotiations. Government bond yields declined worldwide, led by Europe. In the US, growth data for the fourth quarter of 2018 were not published due to the partial government shutdown, but indicators point to slower growth in that quarter and in the first quarter of 2019. Retail sales declined sharply, stemming in part from the deferral of US federal government workers’ salaries. In Europe, economic activity continues to lose momentum and sentiment indices continue to weaken. Germany and Italy are notably weak, with the latter slipping into a recession. In the UK, fourth quarter 2018 growth declined because investments decreased sharply in view of Brexit. In Japan, there was slight growth in the fourth quarter, driven by domestic demand, a partial correction to the contraction in the third quarter. Emerging markets are relatively stable, helped by the decline in risks of further monetary tightening worldwide. Growth in China continued to weaken and PMI indices also point to weakness in manufacturing. Oil prices increased due to a decline in OPEC output, after prices declined sharply since October 2018 against the background of growth in global supply (Figure 23).
The minutes of the monetary discussions prior to this interest rate decision will be published on March 11, 2019. The next decision regarding the interest rate will be published at 16:00 on Monday, April 8, 2019, following which the Governor will hold a press briefing.