The Monetary Committee decides on October 8, 2018 to keep the interest rate unchanged at 0.1 percent
- The inflation environment has not changed markedly since the previous interest rate decision, despite slightly lower than expected recent CPI readings: The annual inflation rate is in the lower part of the target range, and expectations for the various ranges remained in their environment of the previous interest rate decision. Nevertheless, the Monetary Committee assesses that the forces supporting an increase in inflation still prevail; the main risk to the entrenchment of inflation within the target is the possibility of a sharp appreciation in the shekel.
- Preliminary estimates of third quarter activity support the assessment that the economy continued to grow at a solid pace, while the second quarter growth rate was affected by transitory factors. The downward trend in the current account surplus is a further indication of the expansion of demand in the economy. The labor market remains tight. Based on the Research Department’s staff forecast, GDP is expected to grow by 3.7 percent in 2018 and by 3.6 percent in 2019.
- The macro picture conveyed by the global economy remains positive, particularly in the US, but various indicators point to a softening of momentum in view of a worsening of the trade war, an increase in political risk in Europe, and volatility in financial markets of emerging economies. The Federal Reserve is expected to raise the federal funds rate, while in Europe and Japan core inflation remains low and the accommodative monetary policy continues.
- The shekel is at an appreciated level similar to that of the previous interest rate decision, despite volatility between the meetings, with a slight appreciation of 0.2 percent in terms of the nominal effective exchange rate for the intermeeting period.
- The downward trend in home prices, which began approximately a year ago, has halted. The increase in new mortgage volume continues, and mortgage interest rates remain stable. Building starts increased in the second quarter, but their volume remains very low.
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.
Since the previous interest rate decision, there has not been a marked change in the inflation environment: The CPI readings for July and August were slightly lower than expected, and the past year’s increase in the annual inflation rate, which reached above the lower bound of the target, stopped—in the 12 months ending in August, the inflation rate was 1.2 percent. All CPI components, except communication, contributed positively to annual inflation in the past 3 months (Figure 1 in the attached data file). The rate of inflation in prices of tradable goods remains positive, impacted by an increase in energy prices, and the rate of increase of nontradable goods prices remains stable (Figure 3). Expectations for the various ranges remained in the same environment as at the time of the previous interest rate decision. In the coming months, there is likely to be a transitory decline in the inflation rate to below the lower bound of the target range, but 1-year inflation expectations from various sources are around the lower bound (Figure 4). Forward expectations for medium terms are entrenched within the target range, and the expectations for longer terms are anchored around the midpoint of the target (Figure 5). According to the Research Department’s staff forecast, the inflation rate over the coming four quarters will be 1.4 percent. The shekel remains relatively stable at an appreciated level. After the previous interest rate decision, it strengthened but subsequently weakened, and for the intermeeting period overall there was a slight appreciation of approximately 0.2 percent in terms of the nominal effective exchange rate (Figure 6). The forces supporting an increase in inflation still prevail: The increase in wages in the economy, robust private consumption, inflation abroad, and an expansionary fiscal policy all support the continued rise of the inflation rate in the coming year. The main risk to the entrenchment of the inflation rate within the target is the possibility of a sharp appreciation of the shekel.
After the previous interest rate decision, government bond yields increased, in view of a sharp rise in corresponding yields in the US. In the past month, there was a slight decline in the yield spreads between corporate bonds and parallel government bonds, after a prolonged increase since the beginning of the year.
Regarding economic activity, preliminary estimates of third quarter activity point to continued growth at a solid pace, while second quarter growth was impacted by transitory factors, among other things by volatility in vehicle purchases. The Composite State of the Economy Index for August increased by 0.4 percent (Figure 12); the Consumer Confidence Index increased both for the current and expectation indices; the Purchasing Managers Index declined in August, but remains at a level signifying expansion. Initial findings from the Companies Survey for the third quarter and findings from the Business Tendency Survey support this assessment as well. The downward trend in the Current Account surplus continues, primarily as a result of the increase in goods imports in the past year. This indicates expansion of demand, which against the background of full employment is steered to expansion of imports (Figure 13). The labor market remains tight—the unemployment rate remains low and the employment and participation rates are high. The ratio of job vacancies to total employee posts remains high, and wages continue to increase at a solid pace (Figure 17), primarily in the business sector. According to the Research Department’s staff forecast, GDP is expected to grow by 3.7 percent in 2018 and by 3.6 percent in 2019.
The downward trend in home prices that began approximately a year ago has halted, and recent readings point to an increase (Figure 9). The number of transactions, particularly by first home buyers, continued to rise, after a prolonged decline since the middle of 2016. Building starts increased in the second quarter, but their level remains low. New mortgage volume continues to expand, and mortgage interest rates have been stable in recent months (Figure 10).
The macro picture conveyed by the global economy remains positive but various indicators point to a softening of momentum—particularly the slowing in the growth rate of world trade (Figure 19) against the background of a worsening of the “trade war”, an increase in political risk in Europe, and volatility in financial markets of emerging economies (Figure 23). In contrast, the positive trend in the US continues. The OECD slightly lowered the global growth forecast, due to the eurozone and some other economies (Figure 18). US inflation hovered around the 2 percent target, and in Europe and Japan inflation also rose but core inflation remains low (Figure 20). Indicators of activity in the US point to continued solid growth in the third quarter as well, supported by the fiscal expansion—the labor market, private consumption and industrial production remain robust. The monetary contraction is expected to continue: According to the Federal Reserve’s forecast, the federal funds rate will increase once more in 2018 and three times in 2019. In Europe, the growth rate moderated compared with that of 2017, due to a decline in the growth rate of private consumption. Even though the ECB is expected to stop the quantitative expansion at the end of the year, it is not expected to raise the interest rate in the short term, and thus monetary policy remains accommodative. In Japan, there was a recovery in activity in the second quarter, and the policy remains very accommodative. The rise in yields in the US and concern of a trade war continue to weigh on emerging economies. The slowdown in growth in China is reflected in a slowing of investments in infrastructure and in weakness in the manufacturing sector. Oil prices resumed their increases, against the background of supply-side influences (Figure 21).
The minutes of the monetary discussions prior to this interest rate decision will be published on October 22, 2018. The next decision regarding the interest rate will be published at 16:00 on Monday, November 26, 2018.