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  • Inflation in Israel over the past 12 months remains above the upper bound of the target range, at 5 percent, and is high in a wide range of CPI components. Looking at the past 6 months, and even more so over the past 3 months, the pace of inflation is lower than the year-on-year inflation.
  • Inflation expectations and forecasts for the first year from all sources are around the upper bound of the target range. Expectations derived from the capital market for the second year onward are all within the target range.
  • Economic activity in Israel remains strong, but some economic indicators point to a moderation in activity. GDP grew by 2.5 percent in annual terms in the first quarter, a relatively high pace once the temporary effects of changes in vehicle taxation are omitted. The labor market remains tight, and in a full employment environment, but the job vacancy rate is in a downward trend.
  • In the housing market, the number of purchases and new mortgage volume continue to decline. Home prices remained unchanged in April, following a slight decline in March. In contrast, the upward trend in rents continued, and the housing services component of the CPI increased in the past year to 7.2 percent.
  • Since the previous monetary policy decision, the shekel weakened by 1.45 percent against the US dollar, by 0.7 percent against the euro, and by 0.8 percent in terms of the nominal effective exchange rate.
  • Globally, growth remains moderate but higher than expectations from the beginning of the year. The inflation environment remains elevated, but is in a moderating trend. The interest rate increases around the world are continuing, but the pace is slowing.

 

Economic activity in Israel is at a high level, and is accompanied by a tight labor market, although there is some moderation in a number of indicators. Inflation is broad and remains high. Therefore, the Monetary Committee decided to increase the interest rate. The interest rate path will be determined in accordance with activity data and the development of inflation, in order to continue supporting the attainment of the policy goals.

For the file of figures accompanying this notice, click here.​​​ 

 

Economic activity in Israel is remains strong, although there is some moderation in a number of indicators. The labor market remains tight and in a full employment environment. Inflation is above the target range, and is high over a wide range of CPI components. The tighter monetary policy and moderation of activity abroad are expected to lead to a slowing in the pace of inflation alongside some slowdown of economic activity in Israel.

 

Since the previous policy decision, the CPI increased by 0.4 percent in March and by 0.8 percent in April. The April figure was significantly higher than early forecasts in the market, and was influenced in particular by the “Accommodation and vacation in Israel and abroad” component, which was responsible for half of the overall increase (0.4 percentage points out of 0.8 percent). Inflation in the past 12 months is above the upper bound of the target range, at 5 percent (Figure 1). With that, inflation in Israel remains lower than in most of the advanced economies (Figure 37). Net of energy and fruits and vegetables, inflation is 5.3 percent, and with the further neutralization of the effects of taxation and regulation inflation is 5.4 percent (Figure 2). The pace of annual inflation of the nontradable components of the CPI, which mainly reflects the housing services component and services industries, is 5.5 percent. The annual pace of inflation of the tradable components is 4.2 percent (Figure 3). Over the past 6 months, and even more so over the past 3 months, the pace of inflation is lower than that of annual inflation in the prices of both tradable and nontradable goods (in annual terms, seasonally adjusted) (Figure 5). One-year inflation expectations and forecasts are around the upper bound of the target range (Figure 6). Expectations derived from the capital market for the second year and onward remained stable, and are within the target range (Figure 7). The Monetary Committee’s assessment is that the monetary tightening processes in Israel and abroad, and the moderation of demand, are working to moderate inflation.

 

Economic activity remains strong. National Accounts data show that GDP growth in the first quarter was 2.5 percent in annual terms relative to the fourth quarter of 2022 (Figure 17). Smoothing the effect of vehicle purchases, the average growth rate in the past two quarters was about 3.7 percent, close to the potential growth rate. An analysis of the data shows that the level of GDP reflects a high level of activity that has been above the precrisis trend line for six consecutive quarters (Figure 19). First quarter growth was influenced by increases in fixed capital formation and in services exports excluding startups, alongside moderation of private consumption, goods exports and goods imports (Figure 18).

 

Alongside the National Accounts data, some indicators point to a moderation of activity. The aggregate balance of the Central Bureau of Statistics Business Tendency Survey for April declined, but continues to reflect businesses’ positive assessments of their situation (Figure 20). The growth in credit card purchases has moderated in real terms (Figure 21). The equipment and raw materials constraint reported by companies in the Central Bureau of Statistics Business Tendency Survey is around the level reported before the COVID-19 crisis (Figure 25). Services exports increased, and remain very high, and goods exports (in current dollar terms, excluding ships, aircraft, and diamonds) increased as well in April, but remain lower than the 2022 monthly average (Figure 22). Goods imports increased in April due to an increase in vehicle imports, but imports excluding vehicles declined slightly (Figure 23). Tax revenue in the first months of the year (January–April) was in line with Research Department forecasts, and was lower than in the same period last year.

 

The labor market remains tight and in a full employment environment, The employment rate among those aged 15 and over (61.7 percent, seasonally adjusted) remained unchanged in April, and together with the employment rate among the prime working ages (25–64, 78.9 percent, seasonally adjusted), is higher than before the crisis (Figure 26). The unemployment rate for those aged 15+ (3.6 percent, seasonally adjusted) declined relative to the previous month, while the unemployment rate among the prime working ages declined to 3.1 percent (seasonally adjusted) in April (Figure 27).

 

The job vacancy rate is in a downward trend. In the high-tech services industry, rates are lower than the precrisis data, although they have increased slightly in the past two months (Figure 29). According to the Central Bureau of Statistics Business Tendency Survey, the decline in the employee shortage constraint reported by companies continued in April compared with the same month last year. The average wage per employee post in February 2023 shows a decline in the real wage, but a preliminary estimate for March indicates a relatively sharp increase in wages that is mainly due to the one-time grant paid in March to public sector employees. However, real wages remain lower than the long-term trend line, and the cost of labor as a share of GDP is declining (Figure 30).

 

The volume of activity in the housing market continues to moderate. Home prices increases in the past 12 months moderated to 11 percent (Figure 12), and prices remained unchanged in April following a slight decline in March. The declines in the number of housing transactions and in new mortgage volume continue, while the stock of unsold homes held by developers increased markedly in the past year. In April, new mortgage borrowing totaled NIS 4.6 billion, the lowest level since the end of 2019 (Figure 14). The housing services component of the Consumer Price Index increased by 0.5 percent in April (compared with 0.6 percent in March). In annual terms, it continued to increase to 7.2 percent in the past year.

 

During the reviewed period, the Moody’s credit rating agency lowered its ratings forecast for Israel from positive to stable, and left its rating unchanged. S&P left both its rating and its forecast unchanged. Against the background of these decisions, there was some volatility in the markets. Overall, in the domestic capital markets there were increases in the equity indices that slightly exceeded those of the global equity indices. However, since the beginning of the year, the Israeli equity indices are still significantly underperforming relative to global indices (Figure 41). Yields on long-term government bonds increased slightly, and corporate bond spreads narrowed.

 

Since the previous monetary policy decision, the shekel weakened by 1.45 percent against the US dollar, by 0.7 percent against the euro, and by 0.8 percent in terms of the nominal effective exchange rate (Figure 8).

 

With regard to outstanding bank credit, there was an increase in credit to large businesses in April, alongside a moderation of the increase in credit to medium-sized businesses and a decline in credit to small and micro businesses. According to the Central Bureau of Statistics Business Tendency Survey, there was greater difficulty in obtaining credit for the medium business segment in recent months. With that, the difficulty reported in the various segments remains relatively low (Figure 16). In addition, capital raised by the high-tech sector declined significantly relative to recent years, which is part of the global trend (Figure 29).

Globally, growth remains moderate but higher than the expectations at the beginning of the year. The concern of a serious recession in Europe is dissipating, although in the background there has been a significant tightening of the terms of credit and financial conditions, and regional banks in the US are continuing to experience difficulties. Investment houses’ global growth forecasts for 2024 remained virtually unchanged, and they indicate continued moderate growth (Figure 31). The global purchasing managers’ indices of both advanced economies and emerging markets increased, and indicate expectations of economic expansion (Figure 32). Data on the volume of world trade for February 2023 continued to indicate a slowdown in the pace of global activity. The export orders component of the Purchasing Managers Index, which is a leading indicator of world trade data, is recovering but continues to point to expectations of some further moderation in the volume of world trade in the coming months as well. Most of the leading equity indices traded with stability during the period, and oil prices declined.

 

The global inflation environment remains high but the trend of moderation continues (Figure 36). With that, interest rate increases around the world are continuing, but the pace has slowed. In the US, activity data continue to indicate positive but moderate growth, and the labor market remains tight. The CPI moderated slightly in April, to an annual pace of 4.9 percent, and the PCE index was 5.5 percent. The Federal Reserve raised the federal funds rate by 25 basis points, while in its statement it signaled a potential halt to the current cycle of interest rate increases. The markets expect the interest rate to decline during 2023. Inflation in the eurozone also moderated, but it remains relatively high, at an annual pace of 7 percent. Core inflation in the eurozone declined to 5.6 percent but remains high. The ECB increased its interest rate by 25 basis points, and continues to signal that additional interest rate increases are expected. In the UK, the most recent inflation figure surprised to the upside, and inflation was 10.1 percent. The Bank of England increased its interest rate by another 25 basis points. In China, the various indicators point to continued recovery of activity.

 

 

 

The minutes of the monetary discussions prior to this interest rate decision will be published on June 5. The next decision regarding the interest rate will be published at 16:00 on Monday, July 10, 2023, followed by a press briefing with the Governor.