The Monetary Committee decides on November 25, 2019 to keep the interest rate unchanged at 0.25 percent
- The inflation environment remains low. Inflation in the past 12 months is 0.4 percent, and in the past two months, there has also been a decline in inflation excluding energy and fruits and vegetables, in view of the appreciation of the shekel and the slowdown in the increases of housing and food prices. One-year inflation expectations remained stable around the lower bound of the target range, and medium- and long-term expectations declined slightly.
- Following the previous interest rate decision, the shekel weakened slightly and then strengthened again, so that in terms of the nominal effective exchange rate, it remained stable. However, since the beginning of the year, the shekel has strengthened by 8.9 percent, and the appreciation continues to make it difficult to return inflation to the target range.
- Economic activity continues to grow at close to its potential rate, despite the negative global sentiment. Services exports are growing strongly, but the standstill in goods exports continues. The labor market remains tight. However, the political situation remains uncertain, and if the government is forced to operate on a continuance budget for a prolonged period, it may have a contractionary effect.
- Global economic activity continues to slow, and the deterioration in world trade continues. It appears that the process of deepening monetary accommodation by the major central banks has reached its limit at this stage. The signals sent out by the Federal Reserve indicate that the interest rate will remain at its current level unless there is a significant change in the state of the economy, and market assessments are that the ECB is not expected to change its interest rate in the next two years.
The Monetary Committee's assessment is that in view of the inflation environment in Israel, the monetary policies of major central banks, the slowing in the global economy, and the continued appreciation of the shekel, it will be necessary to leave the interest rate at its current level for a prolonged period or to reduce it in order to support a process at the end of which inflation will stabilize around the midpoint of the target range, and so that the economy will continue to grow strongly. Furthermore, the Committee is taking additional steps as necessary to make monetary policy more accommodative. 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 low. The CPI reading for September declined by 0.2 percent, and the reading for October increased by 0.4 percent as expected, so that annual inflation remained below the target range. In the past 12 months, inflation was 0.4 percent (Figure 1 in the attached file of figures). In recent months, there has also been a decline in inflation excluding energy and fruit and vegetables, to 0.5 percent, after having been stable between 0.9 percent and 1.1 percent since the beginning of the year (Figure 2). This decline is mainly due to a slowdown in the rate of increase of the housing and food components in the CPI. Inflation of nontradable goods prices continued to moderate, and inflation in the prices of tradable goods remained negative. Despite the decline in actual inflation, one-year expectations remained stabled around the lower bound of the target range (Figure 4). There was a slight decline in forward expectations for medium and long terms derived from the capital market, and in the past few months, there has been a moderate but continued decline in long-term expectations (Figure 5). Following the previous interest rate decision, the shekel weakened slightly and then strengthened again, so that in terms of the nominal effective exchange rate, it remained stable. Since the beginning of the year, the shekel has strengthened by 8.9 percent (Figure 6). The appreciation continues to make it difficult to return inflation to the target range.
Economic activity continues to grow at near its potential rate, despite the negative global sentiment. However, the continuing uncertainty regarding the political situation in Israel may leave its mark on economic activity. In addition, fiscal policy has so far been expansionary, and if the government is forced to operate on a continuance budget for a prolonged period, it may have a contractionary effect. According to the first estimate of National Accounts data for the third quarter, GDP grew by 4.1 percent (Figure 11). The volatility in vehicle imports continues to be reflected in the data, and the Research Department's assessment is that the growth rate net of this effect was slightly below 3 percent. The gap between the high GDP growth and uses (private and public consumption grew moderately, investment and exports contracted) was reflected in growth of inventory (Figure 12), but it is reasonable to assume that when the data for the quarter are revised, this gap will narrow. Over time, services exports have grown strongly, while goods exports have continued to stagnate. The former has benefited from the continuing boom in the global shares of technology companies (Figure 15), while the latter is more sensitive to world trade and to the appreciation of the shekel. The labor market remains tight. The most recent data show a decline in the unemployment rate, alongside declines in the participation and employment rates. Wage increases are continuing, led by the business sector, but at a slightly slower pace than prevailed at the beginning of the year. The job vacancy rate has been declining moderately for several months, but remains high, and at this stage, it is unclear whether it indicates a slowdown in activity.
Equity indices in Israel continued to increase, alongside increases in global markets. Long-term government bond yields remained stable since the previous interest rate decision, despite the increase in yields in Europe and the US (Figure 7). Yield spreads between corporate bonds of the nonfinancial business sector and comparable government bonds continued the downward trend that started at the beginning of the year.
Home prices continued to increase moderately, and in the past year they have increased by 1.9 percent, while the annual rate of increase in rents is moderating. The number of purchases grew, but purchases by investors appear to be moderating. Mortgage volume continued to expand, and mortgage interest rates continued to decline.
The global economy continued to slow (Figure 20). With the exception of the United States, most third quarter growth data surprised to the downside, and the main weakness is focused on manufacturing. The balance of risks continues to tend downward, and the deterioration in world trade continues (Figure 21), but the risk of significant worsening in view of the "trade war" and Brexit has declined. Inflation remains lower than the central banks' guiding targets (Figure 23), but it appears that the process of deepening monetary accommodation by the major central banks has reached its limit at this stage. In the financial markets, the price increases in equity indices have continued (Figure 26). In the US, the Federal Reserve lowered the federal funds rate by 0.25 percentage points, but signaled that the rate will remain at its current level unless there is a significant change in the state of the economy. Growth surprised to the upside in the third quarter, but it is expected to slow in the fourth quarter. In Europe, growth remains moderate, and industrial production continues to contract, particularly in Germany. The ECB left its interest rate unchanged, and according to market assessments, it is not expected to change in the coming two years. In Japan, growth slowed and is expected to continue slowing in the fourth quarter, in view of the increase in VAT. Growth in China continued to moderate. Oil prices increased since the previous interest rate decision, in view of an expected increase in demand and a reduction of supply (Figure 24).
The minutes of the monetary discussions prior to this interest rate decision will be published on December 9, 2019. The next decision regarding the interest rate will be published at 16:00 on Thursday, January 9, 2020, followed by a press briefing by the Governor.