The Monetary Committee decides on May 20, 2019 to keep the interest rate unchanged at 0.25 percent
- The inflation environment remains stable above the lower bound of the target range. The CPI for April was lower than pre-publication assessments, but CPI readings for the previous three months surprised to the upside, and year-on-year inflation is at a level similar to that of recent months. One-year inflation expectations and forecasts are slightly above the lower bound of the target range, and forward expectations for medium and longer terms remained near the midpoint of the target.
- For the year to date, the shekel has strengthened by 6 percent in terms of the nominal effective exchange rate, and since the last meeting it has appreciated by 1.2 percent. The appreciation is the main factor that is delaying the continued increase of the inflation rate toward the midpoint of the target.
- The high growth rate in the first quarter was impacted markedly by stronger new vehicle sales, along with solid growth in exports. Net of this effect, the economy grew at a rate slightly below its potential. The labor market remains tight: The participation and employment rates increased slightly from already record levels, and wages continue to rise, led by the business sector.
- The risks to the global economy increased, mainly in view of the increasing severity of the "trade war", despite first-quarter growth in major economies surprising to the upside. The slowdown in world trade continues, and includes emerging markets as well. The IMF again revised downward its forecasts for world trade and growth for most regions.
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, fiscal policy, the financial markets, and the global economy, and will act to attain the monetary policy targets in accordance with such developments.
The inflation environment remains stable above the lower bound of the target range. The CPI for April increased by 0.3 percent, lower than pre-publication assessments, but the indices for the three preceding months surprised to the upside. Inflation over the past 12 months was 1.3 percent—similar to the level in recent months (Figure 1 in the attached file of figures). Inflation measured by the adjusted index is slightly lower. Inflation in nontradables, a proxy for the domestic component of inflation, remains above the 2 percent level, and inflation in tradables increased from negative levels to near zero. One-year inflation expectations and forecasts are slightly above the lower bound of the target range, and following the publication of the April CPI, there was a slight decline (Figure 4). Medium-term and long-term forward expectations remain around the midpoint of the target range, but expectations for the second year declined slightly (Figure 5). Since the beginning of the year, the shekel has strengthened by 4.6 percent against the US dollar. In terms of the nominal effective exchange rate, the shekel has strengthened by 6 percent since the start of the year, and by 1.2 percent since the previous interest rate decision. The appreciation is delaying the inflation rate’s continued rise toward the midpoint of the target range.
The equity indices in Israel continued to increase after the previous interest rate decision, but have fallen since the end of April, with an emphasis on the shares of pharmaceutical companies and in view of declines in most of the global markets. The gap between the yields on US and Israeli government bonds narrowed slightly. Yield spreads between corporate bonds and comparable duration government bonds in Israel increased slightly, similar to the global trend (Figure 8).
For the past several quarters, the economy has been growing at near its potential rate. According to the first estimate of National Accounts data for the first quarter of 2019, the economy grew by 5.2 percent (Figures 11 and 12), but the figure was affected markedly by increased new vehicle sales in the first quarter. After adjusting for this effect, the Bank of Israel Research Department's assessment is that economic growth was slightly below 3 percent. Services exports were particularly strong, and goods exports also increased. Most recent data regarding exports are more mixed. There is an apparent decline in the share of companies in the Business Tendency Survey reporting a severe constraint in export orders, but foreign trade data indicate a slowdown in goods exports in April. Private current consumption increased at a relatively moderate rate in the first quarter, and, other than vehicles, most components of investment contracted. Data on the labor market data indicate that it remains tight—the employment rate and the participation rate both increased slightly from the record rates at which they had been (Figure 14), the slight increase in the unemployment rate since the beginning of the year does not indicate an increase in the duration of unemployment – Figure 15), and wage increases are continuing, led by the business sector (Figure 16). However, while the job vacancy rate remains high, it has been declining moderately for several months.
In recent months, home prices reverted to registering moderate increases, and have increased by approximately 0.5 percent in the past year (Figure 9). The number of transactions increased markedly, particularly among first-time homebuyers, alongside the continued decline in investment in residential construction. The trend of expansion in mortgage volume continues, and mortgage interest rates declined slightly (Figure 10).
The risks to the global economy increased, despite first quarter growth data of major economies surprising to the upside (Figure 17), mainly in view of the worsening of the "trade war" between the US and China. The IMF again revised its world trade forecast downward and revised its growth forecasts downward for most regions, particularly for Europe (Figure 18). The slowdown in world trade continues, and includes the emerging economies (Figure 19). In the financial markets, there were declines in equity indices, mainly following the crisis surrounding the trade talks (Figure 23), and government bond yields continued to decline moderately in view of the expectation that the process of global monetary tightening will be halted for now and a worsening of sentiment in the markets. In the US, there was some continued moderation in core inflation. The Fed left the federal funds rate unchanged, and noted that despite the strong growth in the first quarter, there is noticeable moderation in private consumption and in investment. In Europe, the economic picture continues to indicate weakness, although first quarter growth data in a number of leading economies surprised to the upside. The ECB left its interest rate unchanged, and its president noted that there are greater expectations for a slowdown in growth in 2019. In the UK as well, first quarter growth data were encouraging, but the risks regarding Brexit remain high, and its implementation was delayed again. In Japan, the moderation of economic activity since the beginning of the year continued, and its parliament approved an incentive program to support the economy. Growth in China stabilized in the first quarter after moderating at the end of 2018, although data on economic activity indicate continued moderation. Oil prices remained stable since the previous interest rate decision, in view of the decline in supply being offset by worsening sentiment in the markets. (Figure 21).
The minutes of the monetary discussions prior to this interest rate decision will be published on June 3, 2019. The next decision regarding the interest rate will be published at 16:00 on Monday, July 8, 2019, following which the Governor will hold a press briefing.