The Monetary Committee decides on January 10, 2018 to keep the interest rate unchanged at 0.1 percent
- Since the previous interest rate decision, there has been no notable change in the inflation environment, which remains below the target range. Inflation is expected to continue being affected by price reductions initiated by the government, increased competition in the economy, and by the cumulative appreciation of the shekel to date. Wage increases in the economy, increases in energy prices, and the continued rise in rent prices, will support the return of inflation to the target range.
- Indicators of economic activity in the fourth quarter provide a basis for the assessment that the economy continued to grow in the fourth quarter at a pace that is in line with its potential growth rate. Labor market data continue to portray a high level of activity, and indicate a tight labor market. According to the Research Department’s staff forecast, the economy is expected to grow by about 3.5 percent per year in each of the next two years.
- Data on the global economy continue to indicate improvement, and growth forecasts have again been revised upward. However, inflation in most of the major economies continues to range below target. The US Federal Reserve is expected to continue raising the federal funds rate gradually during 2018. The ECB is maintaining its negative interest rate policy, but has begun reducing the volume of quantitative easing.
- The shekel strengthened in recent weeks, mainly against the dollar, in line with the global trend. In the past 12 months, the shekel has strengthened by about 5 percent in terms of the effective exchange rate.
- Housing market data continue to indicate some slowdown in activity, with a decline in the volume of transactions and a continued increase in home prices at a relatively moderate rate.
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.
For the file of data accompanying this notice, click here.
Since the previous interest rate decision, there has been no notable change in the inflation environment, which remains below the target range. Inflation measured over the preceding 12 months reached 0.3 percent in November (Figure 1 in the attached data file). Short-term inflation expectations remained low (Figure 4). Inflation is expected to continue being affected by price reductions initiated by the government, increased competition in the economy, and by the cumulative appreciation of the shekel to date (Figure 6). According to the Research Department’s staff forecast, inflation in the next four quarters is expected to be 1.1 percent, supported by wage increases in the economy, increases in energy prices, and the continued rise in rent prices. However, the annual inflation rate is expected to decline in the beginning of the year, in line with the seasonal path, and to resume its increase only thereafter. Long-term inflation expectations are anchored within the target range (Figure 5).
Nominal yields on long-term government bonds declined since the previous interest rate decision, against the background of a decline in the government’s need to raise debt, and even though the yields on corresponding bonds abroad increased (Figure 7). Real yields in Israel are similar to those in the US and higher than those in Europe. The yield spread between corporate and government bonds remains very low, similar to the global trend.
Indicators of economic activity in the fourth quarter provide a basis for the assessment that the economy continued to grow in the fourth quarter at a pace that is in line with its potential growth rate. This is indicated by initial data from the Companies Survey (Figure 10), the Composite State of the Economy Index, and the continued growth of services exports in October. Goods exports remain at a virtual standstill against the background of the level of the exchange rate and impacted by the volatility in pharmaceutical exports. Labor market data continue to portray a high level of activity, and indicate a tight labor market—a record low unemployment rate, and a record high employment rate (Figure 13), wage increases (Figure 14), a high level of job vacancies relative to the number of unemployed people (Figure 16), and a decline in the rate of people who are employed in part time positions involuntarily (Figure 17). According to the Research Department’s staff forecast, the economy is expected to grow by 3.4 percent in 2018 and by 3.5 percent in 2019 (Figure 11). The forecast is positively affected by the expected increase in vehicle imports in 2018 and by one-off investments expected in 2019.
Housing market data continue to indicate some slowing of activity, with home prices continuing to increase at a relatively moderate rate (Figure 8). The volume of transactions continues to decline, apparently due to uncertainty regarding the effect that government programs in the housing area will have. Recent data indicate some increase in the pace of taking out new mortgages, which stabilized recently following a continued decline. There was a renewed decline in the interest rate on mortgages. (Figure 9). There was a decline in building starts, although some upward revision is expected in the data. There is apparently an increase in building completions, and in the number of permits issued.
Data on the global economy continue to indicate improvement. Growth forecasts have again been revised upward (Figure 18), and the improvement in world trade continues (Figure 19). However, despite the increase in oil prices (Figure 22), inflation in most of the major economies continues to range below the target of 2 percent (Figure 21). The Federal Reserve raised the federal funds rate in December as expected, and is expected to continue increasing it gradually in 2018. The ECB maintained its negative interest rate policy, but began reducing the monthly volume of asset purchases as part of its quantitative easing program, as announced.
In the US, the economic improvement encompasses most sectors of the economy, and the recently passed tax reform is expected to support economic activity in the short term, while increasing the deficit and government debt in the coming years. The economic data published in Europe indicate continued improvement in activity, but there has been some increase in political risk due to developments in Spain and Italy. In Japan, assessments are that the economy is continuing to grow at a pace that exceeds potential, but this is having no noticeable impact on inflation, and policy remains accommodative. In China, the economic data indicate some moderation in economic activity in the fourth quarter.
The minutes of the monetary discussions prior to this interest rate decision will be published on January 24.
The next decision regarding the interest rate will be published at 16:00 on Monday, February 26, 2018.