The Monetary Committee decides on October 19, 2017 to keep the interest rate unchanged at 0.1 percent
- The inflation environment remains very low. The increase in annual inflation resumed, but inflation remains lower than the target range, and there has been no significant change in expectations. Short-term expectations are below the target range, while long-term expectations are anchored within the range.
- Indicators of real economic activity support the assessment that the economy will continue growing at a rate that is in line with potential growth, after some slowdown in the first half of the year. The economy is apparently returning to more balanced growth in terms of the composition of uses.
- The picture of global economic activity continues to improve. The International Monetary Fund raised its growth forecast for all major economies and for world trade. Inflation remains lower than the central bank targets. In the US, the federal funds rate is expected to increase one more time this year, and the ECB is expected to announce a gradual reduction of quantitative easing.
- In recent months, the appreciation of the shekel has resumed. Since the last monetary policy discussion the shekel strengthened by about 3 percent in terms of the nominal effective exchange rate. Over the past 12 months, the appreciation in terms of the effective exchange rate was 6.1 percent.
- The increase in home prices resumed, although at a more moderate rate than in the past. Most indicators point to a slowdown in activity in the housing market.
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.
For the file of data accompanying this notice, click here.
The inflation environment remains very low. Following a sharp decline in inflation in previous months, the change in the CPI readings for August and September was positive. As a result, inflation over the past 12 months has increased, to 0.1 percent (Figure 1 in the data file). Although the pace of increase in the housing component moderated, that component remains the main contributor to positive inflation. In recent months, energy prices have also made a positive contribution. A variety of other components have made negative contributions to inflation, which supports the assessment that the inflation rate reflects the increasing competition in some industries and changes in consumer behavior, and, to a lesser extent than in the past, the price reductions initiated by the government (Figure 2). The cumulative appreciation of the shekel in the past year, as well as moderation of inflation abroad, are reflected in the negative level of inflation in the prices of tradable goods (Figure 3). Wage increases in the economy have, in the past year, started to be reflected in an increase in unit labor cost, and are expected to contribute to a return of inflation to within the target range. The low inflation environment is also reflected in the stability of short-term expectations from the various sources below the target range (Figure 4), while long-term expectations are anchored within the target range (Figure 5). The Research Department’s assessment is that inflation is expected to be 1 percent in the coming year (ending in the third quarter of 2018).
Since the previous interest rate decision, there was no significant change in nominal long-term government bond yields, so that the spread between them and the parallel US government bonds remained at a negative low (Figure 6), although real yields in Israel are similar to US yields and higher than those in Europe. Yield spreads between corporate and government bonds remained very low.
Indicators of economic activity remain positive and indicate solid growth in the third quarter, according to initial data from the Companies Survey (Figure 11), and the high levels of the Consumer Confidence Index and the Purchasing Managers Index, despite some moderation in private consumption relative to the rapid increase it showed in 2016. The slowdown in goods exports end data is a result of volatile factors (Figure 12), and a recovery of exports is apparent over time, with an emphasis on services exports. Labor market data continue to support the assessment of full employment, which is what led to moderation in growth relative to 2016. The participation and employment rates are high, and there was a further decline in the unemployment rate (Figure 13) which, it is worth noting, encompasses all levels of education (Figure 14), with stability at a high level in the number of work hours per employee and a record high level in the job vacancy rate. Wage increases moderated slightly in recent months, after accelerating in previous months. According to the Research Department’s updated staff forecast, GDP is expected to grow by 3.1 percent in 2017 and by 3.3 percent in 2018.
Housing market data continue to indicate moderate demand and a slowing of activity, but home prices continue to increase at a relatively moderate rate (Figure 8). The number of transactions remains moderate. In recent months, the pace of new mortgages taken out stabilized following a prolonged decline, with a moderate decline in the mortgage interest rate (Figure 9).
Global economic activity is improving, and world trade is growing at a stronger pace (Figure 17). The IMF raised its growth forecast for all of the major economies and for world trade (Figure 16), but noted that while the short-term risks of a deviation from the forecast are balanced, medium-term risks are toward a worsening of growth, with an emphasis on financial and geopolitical risks. Inflation in most major economies remains below target (Figure 19). In the US, the positive trend in economic activity apparently continued in the third quarter, despite interruptions in activity, which are apparently temporary and limited in scope, as a result of extreme weather. The administration presented a detailed plan for reducing taxes, but there is still uncertainty regarding the format and timing in which it will be realized. The Fed announced that it would begin to reduce its balance sheet this month, and assessments are that the federal funds rate will be raised once more in December. In Europe, the entrenchment of growth is continuing, with the improvement encompassing both core and peripheral economies. At this stage, political developments in Spain are not undermining stability. Assessments are that when the ECB extends its bond purchasing program, it will announce a gradual reduction in its volume. In Japan, growth figures for the second quarter were revised downward, but they remain significantly higher than the potential growth rate, and the positive momentum apparently continued into the third quarter. In China there was a slight slowdown in growth in the third quarter. Oil prices increased by about 10 percent since the end of August.
The minutes of the monetary discussions prior to this interest rate decision will be published on November 2, 2017.
The next decision regarding the interest rate will be published at 16:00 on Monday, November 27, 2017.