The Monetary Committee decides on January 7, 2019 to keep the interest rate unchanged at 0.25 percent
- The inflation rate has stabilized above the lower bound of the target range, notwithstanding the slightly lower than expected decline of 0.3 percent in the CPI for November. In the past six months, the annual inflation rate has ranged between 1.2 percent and 1.4 percent. In the coming months, inflation is expected to range around the lower bound of the target. The Research Department forecasts inflation of 1.3 percent over the coming four quarters. Medium-term expectations remained entrenched within the target range. Continued wage increases and the economy being around full employment will support a continued rise in inflation toward the midpoint of the target range, as will the depreciation, to the extent it persists.
- An analysis of recent data and of updated indicators of economic activity continues to support the assessment that the economy is converging to its potential growth rate, despite the low growth in the second and third quarters. The tight labor market supports this assessment, as does the growth of imports and the widening of the trade deficit. Indicators of fourth quarter activity point to some acceleration in the growth rate.
- The global macroeconomic picture continues to convey a slowing of momentum, high volatility, and lack of certainty. The US economy remains robust, though the risks due to the worsening “trade war” and the slowing in Europe continue to weigh on momentum. There were price declines and sharp volatility in most equity indices, and expected monetary contraction worldwide is seen to be slowing.
- Since the increase in the interest rate, the nominal effective exchange rate has been relatively stable, after the shekel depreciated in the preceding weeks.
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 has stabilized above the lower bound of the target range, even though the CPI reading for November declined by 0.3 percent and was slightly lower than expected. In the past six months, the annual inflation rate has ranged between 1.2 and 1.4 percent, but the index adjusted for the effect of energy, fruit and vegetable prices, as well as the price changes initiated by the government, is slightly lower (Figure 2 in the attached data file). Inflation in tradable goods prices continued to moderate, primarily as a result of the decline in energy prices. Inflation in prices of nontradable items, which serves as an approximation of the domestic component of inflation, continued to increase (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 range between 0.9 percent and 1.2 percent (Figure 4). The Research Department expects inflation of 1.3 percent over the coming four quarters. Expectations for medium terms remained entrenched within the target range, and in recent months there was some decline in longer-term expectations (Figure 5). Since the increase of the interest rate, the nominal effective exchange rate has remained relatively stable, following a depreciation of the shekel in the weeks prior to the increase (Figure 6). The continued increase in wages and the economy being around full employment will support a continued rise in inflation toward the midpoint of the target, as will the depreciation, to the extent it persists. The steep decline in oil prices in recent months may offset the factors supporting inflation, but its impact on the “adjusted indices” will be limited.
Since the previous interest rate decision, government bond yields have been relatively stable, despite the sharp decline in parallel yields in the US. The yield spreads between corporate bonds and comparable government bonds increased. In the past two months, Tel Aviv Stock Exchange equity indices declined by approximately 10 percent (Figure 10), which is in line with the marked declines on major global equity indices (Figure 25).
Regarding economic activity, the first estimate by the Central Bureau of Statistics for full year growth in 2018 is 3.2 percent, similar to the long-term growth rate. After the growth rate slowed in the second and third quarters of 2018, the findings from the fourth quarter Companies Survey (Figure 14) and data on tax revenues support the assessment that the economy is growing at a pace hovering around the long term path. In addition, the Composite State of the Economy Index, which increased by 0.3 percent in November, with data for October revised upward, even hints at a faster pace in the fourth quarter (Figure 13). Labor market data show that it remains tight—the unemployment rate remains low, although there was an increase in unemployment benefit claims in recent months; the share of job vacancies out of total employee posts is at a peak (Figure 18); and wages continue to increase (Figure 19). All of these support the assessment that the economy is around full employment, thus creating a supply constraint. The increases of imports and the widening of the trade deficit also support this assessment. According to the Research Department’s assessment, GDP is expected to grow by 3.4 percent in 2019, slightly lower than the previous forecast, and by 3.5 percent in 2020. Growth in those years will be positively impacted by notable activity of several large companies.
Home prices have stabilized in recent months (Figure 9), with a continued decline in building starts and an increase in the number of those planning to purchase a home. Moderate growth in mortgage volume continued; mortgage interest rates rose moderately, while the spread between them and government bond yields has narrowed (Figure 11).
The macro picture conveyed by the global economy continues to indicate declining momentum, high volatility, and uncertainty. It appears that the risks due to a worsening of the “trade war” are trickling down to the business activity of leading corporations as well. Investment houses revised their growth forecasts downward for most regions (Figure 20), and the moderation in world trade continues among the advanced economies (Figure 21). The expected global monetary contraction is projected to slow. Despite the continued increases in the interest rates of the US and some other economies, US markets are no longer pricing in an additional rise, and European markets have pushed off the timing of an expected interest rate increase. In financial markets, there were sharp declines and volatility in most equity indices (Figure 25), government bond yields declined, and corporate bond spreads widened. The US economy continued to grow at a rapid pace, but the rate is expected to moderate slightly in the fourth quarter. The major economies in Europe convey a mixed picture—there was positive growth in France and Spain, while contraction was seen in Germany and Italy. There was accelerated growth in the UK, but the uncertainty regarding Brexit remained high. In Japan, the economic activity data published in the fourth quarter indicate a recovery, following contraction in the third quarter. Emerging markets are relatively stable, but the growth rate may be negatively impacted by a possible deterioration in the “trade war” and the effects of monetary contraction in advanced economies. Growth in China continued to weaken in the fourth quarter as well, mainly in the manufacturing sector. Oil prices continued to decline until recently, despite the decision by oil producers to cut back on output (Figure 23).
The minutes of the monetary discussions prior to this interest rate decision will be published on January 21, 2019. The next decision regarding the interest rate will be published at 16:00 on Monday, February 25, 2019.