The Monetary Committee decides on January 3, 2022 to keep the interest rate unchanged at 0.1 percent
- Economic activity continues apace, and labor market data for November and the first half of December indicate an improvement in the employment indices.
- However, the increase in the morbidity rate and in the infection coefficient due to the “Omicron” variant, increase the risk to activity and may have macroeconomic significance in accordance with their scope. These developments are leading to an increase in uncertainty regarding the intensity of economic activity in the short and medium term.
- Inflation in Israel stabilized around the midpoint of the target range. The CPI for November declined by 0.1 percent. Inflation in the past 12 months was 2.4 percent. Inflation expectations for the coming year and for the medium and long terms are within the target range.
- Since the previous interest rate decision, there has been increased volatility in the exchange rate. At the end of the period, the shekel had weakened by 0.7 percent against the US dollar, by 1 percent against the euro, and by 0.2 percent in terms of the nominal effective exchange rate.
- Economic activity continues apace. Labor market data for November and the first half of December indicate a marked improvement in the employment indices.
- The Research Department revised its macroeconomic staff forecast. Its assessment is that GDP will grow by 5.5 percent in 2022, and by 5 percent in 2023.
- Home prices increased by 10.3 percent in the past 12 months, a significantly higher rate than in recent years.
- The global economy continued its trend of recovery during the reviewed period, but there was an increase in uncertainty in view of the spread of the “Omicron” variant, which may cause difficulties in the production and supply chains. In most countries, the inflation indices have increased to levels higher than their central bank targets, and monetary tightening around the world continues.
The Israeli economy’s process of recovery from the crisis continues. However, there are still challenges to economic activity. The Committee will therefore continue to conduct an accommodative monetary policy for a prolonged time, in accordance with the pace of growth, employment, and the path of inflation. This is in order to continue supporting the attainment of the policy targets and the economic recovery from the crisis, and to ensure the continued orderly functioning of the financial markets.
The ongoing economic activity in Israel continues to expand 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. However, the increase in the morbidity rate and in the infection coefficient due to the “Omicron” variant increase the risk to activity and may have macroeconomic significance in accordance with their scope. These developments are leading to an increase in uncertainty regarding the intensity of economic activity in the short and medium term.
Since the previous interest rate decision, inflation in Israel has been stable around the midpoint of the target range (Figure 1). The CPI for November declined by 0.1 percent. Inflation in the past 12 months was 2.4 percent (2.1 percent net of energy and fruit and vegetables; Figure 2). The year over year rates of increase in the prices of nontradable components and in the prices of tradable components stabilized (Figure 3). One-year inflation expectations from all sources declined slightly, and are within the target range. However, there remains a gap between expectations derived from the capital market, and the lower expectations derived from the banks’ internal interest rates and of the professional forecasters, although the gap narrowed during the reviewed period (Figure 4). Medium- and long-term expectations are all within 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 interest rate decision, there was some volatility in the exchange rate. At the end of the period, the shekel had weakened by 0.7 percent against the US dollar, by 1 percent against the euro, and by 0.2 percent in terms of the nominal effective exchange rate (Figure 6).
Economic activity continues apace. The aggregate balance of the Central Bureau of Statistics Business Tendency Survey continued to increase in November (Figure 15), and is similar to its precrisis level in 2019. In view of the continued global supply chain difficulties, there was an increase in the intensity of the equipment and raw materials constraints that companies reported (Figure 26). Credit card purchases stabilized at a high level since the end of October. However, with the increase in the spread of the Omicron variant in December, there was a decline in credit card purchases, especially in the domestic tourism industries (Figure 17). Goods exports (excluding ships, aircraft, and diamonds) remained unchanged, and remain higher than their precrisis levels. Services exports continued their upward trend, and are at a very high level (Figure 18). Goods imports continue to increase, and all components are at high levels (Figure 20).
Labor market data for November show a marked improvement in the employment indices. The broad unemployment rate declined to about 6.5 percent in November (Figure 21). The adjusted employment rate increased to 60.2 percent—the highest level since the start of the COVID-19 pandemic—reflecting a gap of about 60,000 employed persons (0.9 percentage points) compared with the average employment rate in 2019. Labor market data for the first half of December show a similar picture. The number of job vacancies remained high in November, and is higher than in the months prior to the crisis (Figure 23). The high level of job vacancies alongside the decline in unemployment reflect a tightening of the labor market. It should be noted that, at least until September, wage levels (after neutralizing the effects of the composition of employees that typified the COVID-19 crisis period) in most industries were similar to the precrisis trend, but there has been some recent acceleration in wage increases in some industries.
The Bank of Israel Research Department revised its staff forecast. In its assessment, GDP will grow by 5.5 percent in 2022 and by 5 percent in 2023 (Figure 14). The adjusted employment rate is expected to continue increasing slightly, to 60.7 percent at the end of 2023. Accordingly, the broad unemployment rate is expected to continue declining, to about 4.4 percent at the end of 2023. The inflation rate is expected to be 1.6 percent in 2022, and 2 percent in 2023. In addition, the debt to GDP ratio in 2022 and 2023 is expected to be 69 percent.
Home prices increased by 10.3 percent in the past 12 months (Figure 10), a significantly higher pace than in previous years. The volume of mortgages taken out remained high in November, in line with the trend since the beginning of 2021 (Figure 11). Alongside these, the annual rate of increase in rental prices remained relatively moderate, although there was some increase in the most recent data.
In the domestic capital market, equity prices continue to increase, and government bond yields declined slightly in most ranges. Corporate bond spreads increased slightly, but remained low. (Figure 9). The credit market continues to function well, with stable and low interest rates. The Central Bureau of Statistics Business Tendency Survey shows that financing difficulties among businesses of various sizes have returned to levels similar to those prior to the crisis (Figure 13).
The global economy continued its trend of recovery during the reviewed period, but there was an increase in uncertainty toward the end of the period, in view of the spread of the “Omicron” variant. The increase in morbidity may lead to a slowdown in the pace of economic activity in the short term, and may continue to cause difficulties in the production and supply chains. The revised growth forecasts of the various investment houses remained virtually unchanged. The global Purchasing Managers Index increased slightly and continues to indicate a relatively high level of economic expansion, particularly in the services sector (Figure 30). The volume of world trade also increased slightly, and remains at relatively high levels (Figure 29). The positive sentiment in the equity markets in most advanced economies continues. The government bond markets were typified by a mixed trend. Yields in Europe increased, while there was a slight flattening in the US yield curve. Oil and other commodity prices remained virtually unchanged. Natural gas prices in Europe were very volatile in view of the energy crisis in Europe. The global inflation environment continues to increase. In most countries, the inflation indices increased to levels higher than their central bank targets, and in some, core inflation is also higher than the targets. Some central banks and forecasters therefore adjusted their assessments regarding the temporary nature of the inflation, and monetary tightening around the world continued. In the US, the Federal Reserve left the federal funds rate unchanged, but again 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. In addition, the Fed revised the forecast pace of interest rate increases upward, in view of the further increase in inflation, to a year-over-year level of 6.8 percent, and the continued recovery of the labor market. In Europe, the sharp increase in annual inflation continues, with the rate now at 4.9 percent. The ECB left its interest rate unchanged, and announced a reduction of its purchases in the markets. In the UK, inflation increased sharply, to 5.1 percent, and the Bank of England increased its interest rate by 15 basis points to 0.25 percent. There were interest rate increases in a number of additional countries where inflation was significantly higher than the central bank targets (Figure 34).
The minutes of the monetary discussions prior to this interest rate decision will be published on January 17, 2022. The next decision regarding the interest rate will be published at 16:00 on Monday, February 21, 2022.