•       In recent months, there has been a slight increase in the inflation environment, though it remains below the target. Annual inflation increased, and short-term expectations rose slightly. Long-term expectations are anchored within the target range.
  •       The economy continues to expand at a pace that is consistent with its potential growth. However, the first estimate of third quarter National Accounts shows a halt in the recovery of exports, due to a decline in goods exports, while private consumption returned to being the main component of growth. All indicators from the labor market continue to point toward its strength, and to show that it hovers around full employment.
  •         The positive momentum in the global economy continues to gain traction. Despite the improvement in activity and the increase in oil prices, inflation in most major economies remains below target. Some of the major central banks shifted their monetary policy to a less accommodative direction, but the monetary environment remained very expansionary.
  •        The exchange rate has stabilized since the last monetary discussion. In the past 12 months, the shekel has appreciated by 5.0 percent in effective exchange rate terms.
  •        Housing market data continue to indicate some slowdown in activity, with the continued increase in home prices at a relatively moderate rate.


The Monetary Committee intends to maintain the accommodative policy as long as necessary in order to entrench the inflation environment within the target range. 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.

In recent months there has been a slight increase in the inflation environment, though it remains below the target. Inflation measured over the preceding 12 months has increased since August, and reached 0.2 percent in October (Figure 1 in the attached data file). The price reductions initiated by the government renewed their impact, though to a lesser extent than previously (Figure 2). The rate of inflation in tradable goods is increasing but remains negative, in view of the development of the exchange rate (Figure 6) and changes in consumer behavior, and despite the moderate positive contribution of energy prices. Inflation in nontradable goods is increasing, primarily due to the continued rise in the housing component, as well as by the increase in purchasing power resulting from rising real wages. Inflation forecasts and expectations increased for most ranges following the publication of the October CPI, though short term expectations for up to two years remain below the target (Figures 4, 5). Long-term expectations remain anchored within the target range.


In recent months, there has been no significant change in nominal long-term government bond yields, which are low relative to the yield in the US and markedly higher than those in Europe (Figure 7). Real yields in Israel are similar to those in the US and higher than those in Europe. Yield spreads between corporate and government bonds remain very low.


According to the first estimate of National Accounts data, growth accelerated in the third quarter to a rate of 4.1 percent, so that the average growth rate in the past year is in line with the economy’s potential growth rate (Figure 10). In the third quarter, current private consumption returned to being a major component of growth, while growth of exports (excluding diamonds and startups) halted (Figure 12). Goods exports contracted—against the background of the appreciation of the shekel, and despite the continued rapid rate of growth in world trade, while services exports grew at a strong pace. Labor market data continue to indicate a high level of activity. Wages continue to increase at a rapid pace, the number of job vacancies grew, and the unemployment rate is on a downward trend—all these support the assessment that the labor market is at full employment.


Housing market data continue to indicate some slowing of activity, with home prices continuing to increase at a relatively moderate rate (Figure 8). The volume of transactions continues to decline, apparently due to uncertainty regarding the effect that government programs in the housing area will have. The volume of new mortgages has been relatively stable for the past nine months, and in the past three months, the interest rate on mortgages has also stabilized (Figure 9).


The positive momentum in global economic activity continues to gain traction. Analysts increased their growth forecasts, and are projecting continued improvement in 2018 (Figure 16). Despite the improvement in activity—which is reflected in a decline in the unemployment rate and a reduction in the output gap in the various economies—and the increase in oil prices (Figure 19), inflation in most major economies remains below target (Figure 18). Some major central banks shifted their monetary policies to a less accommodative direction. The US Federal Reserve is expected to increase the federal funds rate in December; the ECB announced, as expected, that its bond purchases will continue in 2018, but at a reduced volume; and the Bank of England raised its interest rate. With that, the monetary environment remains very accommodative (Figure 20). The policy measures in Europe and the UK were accompanied by dovish messages, and in Japan, the central bank repeated its commitment to accommodative policy. The US economy grew rapidly in the third quarter, and according to preliminary assessments, similar growth is expected in the fourth quarter as well. The tax reform should get underway at the beginning of 2018, and support growth in the short term, while increasing the deficit and government debt. In the eurozone, rapid growth continued in the third quarter, with a continued decline in political risk, and forecasts were revised upward. In Japan, positive growth has continued for nearly two years, and the election results strengthen the assessments that the accommodative policy will continue. In China, the slowdown in the growth rate continues, and concerns over the government’s ability to deal with the high leverage in the Chinese economy remain high.



The minutes of the monetary discussions prior to this interest rate decision will be published on December 11, 2017.

The next decision regarding the interest rate will be published at 16:00 on Wednesday, January 10, 2018, following which the Governor will hold a press briefing​