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Monetary Committee decides to return to monthly interest rate discussions. Click here to view announcement.Monetary Committee decides to return to monthly interest rate discussions
Background conditions
Inflation data: The Consumer Price Index (CPI) for July increased by 0.3 percent, in line with projections. The main components contributing to the increase in the CPI were fruit and vegetables, housing, and education, culture and entertainment, while there was a seasonal decline in the clothing and footwear component. The rate of inflation measured over the past 12 months was 2.2 percent.
Inflation and interest rate forecasts: Private forecasters’ inflation expectations for the next 12 CPI readings increased slightly, on average, to 1.9 percent. Inflation expectations for the coming 12 months derived from banks’ internal interest rates declined slightly, to 1.5 percent, and expectations derived from the capital market remained at 1.4 percent, on average. Forward expectations for terms of 2 years and longer (monthly averages) remained stable, and range from 2.3–2.6 percent. Private forecasters’ average projections are for the August CPI to increase by 0.4 percent. Expectations for the Bank of Israel interest rate 1 year from now, based on the Telbor market, increased to 1.3 percent.
Real economic activity: Assessments of economic activity are that activity net of the effect of natural gas production continues to expand at a rate similar to that of the previous 2 years, as the increase in domestic demand, particularly in private consumption, offsets the decline in exports. The first estimate of the second quarter National Accounts data (annualized data, seasonally adjusted) was impacted by the start of natural gas production—GDP grew by 5.1 percent and business sector product increased by 5.9 percent. Private consumption increased by 6.7 percent, higher than would have been forecast based on purchases brought forward ahead of the VAT increase, and there was a marked increase as well in public expenditure (8.8 percent, excluding defense imports). This was in contrast to declines in exports (a decline of 8.2 percent, excluding diamonds and start-up companies) and in investments (a decline of 2.6 percent). The Composite State of the Economy Index increased by 0.2 percent in July, and previous data were revised upward. Goods exports excluding diamonds declined by 7.6 percent in July, though manufacturing exports are subject to volatility due to the effect of several large companies on the aggregate figure. Over time, the picture presented by manufacturing exports, similar to developments in global trade, indicates a standstill at the 2011 level. Consumer goods imports increased in recent months and there was a partial correction of the decline in investment goods and raw materials imports. Expectations of future economic activity are consistent with continued moderate growth at a rate similar to that of the recent period. The Climate Index based on the Business Tendency Survey of the Central Bureau of Statistics moderated in August, with moderation as well in expectations for the coming 3 months. Various Consumer Confidence Indices increased this month, but they continue to indicate relatively low levels of consumer confidence.
The labor market: The unemployment rate increased in the second quarter from 6.6 percent to 6.9 percent. Monthly data indicate stability in the unemployment rate from April to June, and the unemployment rate in primary working ages declined during the second quarter from 6.1 percent to 5.9 percent. Labor force survey and employee posts data indicate a standstill in the number of employed persons, but this is with an increase in the number of work hours per employed person. Nominal wages increased by 0.3 percent and real wages increased by 0.15 percent in March–May, based on seasonally adjusted data, compared with December–February. Health tax receipts by the National Insurance Institute, which provide an indication of total wage payments in the economy, were 4.2 percent higher in June–July, on a nominal basis, than in the corresponding two months of the previous year, compared with a 5.7 year over year growth rate measured in the previous two months.
Budget data: In January–July, the government’s cumulative deficit in domestic activity was about NIS 7 billion (about 0.7 percent of GDP) below the path consistent with the deficit ceiling for 2013. This was the result of a relatively low expenditure level compared with the path in the budget approved by the Knesset on July 30. Tax receipts in recent months were higher than the seasonal path, even net of the impact of purchases brought forward ahead of the VAT rate increase and one-time government revenue, which likely indicates improved economic activity. Total revenue for January–July is similar to the seasonal path.
The foreign exchange market: From the monetary policy discussion on July 28, 2013, through August 23, 2013, the shekel remained essentially unchanged against the dollar and in terms of the nominal effective exchange rate. The shekel weakened by 0.8 percent against the euro. Since the beginning of the year, the shekel has appreciated by 5.7 percent in terms of the effective exchange rate.
The capital and money markets: From the monetary policy discussion on July 28, 2013, through August 23, 2013, the Tel Aviv 25 Index declined by 2.5 percent. Government bond yields increased along the unindexed curve by up to 50 basis points. Along the CPI-indexed yield curve, yields increased more moderately, by up to 30 basis points. The yield differential between 10-year Israeli government bonds and equivalent 10-year US Treasury securities increased slightly, but remained low at 118 basis points. Makam yields increased along the entire curve by up to 8 basis points, and the one-year yield increased to 1.3 percent during the period. Israel's sovereign risk premium as measured by the five-year CDS spread increased by 19 basis points, to 130 basis points. The Tel-Bond 60 Index declined slightly by about 0.3 percent. At the same time, spreads in the corporate bond market remained low.
The money supply: In the twelve months ending in July, the M1 monetary aggregate (cash held by the public and demand deposits) increased by 14.6 percent, and the M2 aggregate (M1 plus unindexed deposits of up to one year) increased by 5.2 percent.
Developments in the credit markets: The total outstanding debt of the business sector declined by 1.6 percent in June, to NIS 776 billion, primarily as a result of net repayment of bank debt, and the appreciation of the shekel in June. The private nonfinancial sector issued about NIS 1.8 billion in bonds, compared with an average of NIS 2.5 billion since the beginning of the year. A quantitative estimate of business credit, net of exchange rate and linkage effects, indicates that there was no change in the balance of credit since the beginning of the year. Household debt increased by 0.8 percent in June, to NIS 397 billion, with an increase of 0.3 percent in households’ housing debt, to NIS 279.4 billion.
In June, there was about NIS 5 billion in new mortgages granted, compared with a monthly average of 4.4 billion since the beginning of the year. Interest rates on new mortgages increased slightly in July, primarily in the variable-rate CPI-indexed track, while it remained unchanged on other tracks. Against the background of the growth in housing credit volume, and its characteristics, and in order to reduce the risk to mortgage borrowers and to the banking system, the Supervisor of Banks published draft guidelines which limit the share of repayment out of income, the share of the loan which may be granted at variable rate interest, and the term until final loan repayment.
The housing market: The housing component of the CPI (based on housing rents) increased by 1 percent in July, following an increase of 0.3 percent in June. In the twelve months ending in July, this component increased by 3.1 percent, similar to the increase over the twelve months ending in June. Home prices, which are published in the Central Bureau of Statistics survey of home prices but are not included in the CPI, increased by 0.5 percent in May–July, and data for previous months were revised upward. Based on the updated data, the decline in the annual rate of home price appreciation has halted, and they increased by a rate of 9.3 percent in the twelve months ending in June, compared with an increase of 8.7 percent in the twelve months to May. The number of transactions in the housing market continues to increase.
The global economy: The global picture indicates slow improvement in advanced economies, compared with moderation, and in some cases deterioration, in emerging economies. Several indicators published in the US this month point to improvement in the US economy, including a shrinking trade deficit and improved purchasing managers indices. Most housing market indicators continue to show strength. In the eurozone, after six consecutive quarters of negative growth, positive growth was recorded, and expectations are for continued improvement in the future. Yet at the same time, the unemployment rate in the eurozone is at record levels, and with regard to financial situation it has been assessed that Greece will need an additional bailout. Some emerging economies suffered capital outflows as a result of assessments that the rate of quantitative easing the US will soon slow. The Reserve Bank of India was forced to increase some interest rates and impose limitations on capital flows, and it announced the beginning of a bond purchase plan. In Brazil, the lack of trust in the government’s budget management increased and the projected growth rate was reduced again. In China, despite published data which was stronger than expected, there was increased concern about developments in the credit market and the composition of economic growth, which is not based on domestic consumption. Global capital markets operated under the shadow of concerns over the tapering process and there is still uncertainty about when the process will begin, and its strength. Bond yields increased in most economies, even against the background of the improvement in Europe. Oil prices increased by 3 percent this month against the background of the situation in Egypt, and there was a sharp increase as well in industrial metals prices. With that, inflation threats are not seen in advanced economies. Central banks in all advanced economies did not change their interest rates this month, except for an interest rate reduction in Australia. The President of the ECB reiterated that the eurozone interest rate will remain low for a very long time.
The main considerations behind the decision
The decision to keep the interest rate for September 2013 unchanged at 1.25 percent is consistent with the Bank of Israel's interest rate policy, which is intended to entrench the inflation rate within the price stability target of 1–3 percent a year over the next twelve months, and to support growth while maintaining financial stability. The path of the interest rate in the future depends on developments in the inflation environment, growth in Israel and in the global economy, the monetary policies of major central banks, and developments in the exchange rate of the shekel.
The following are the main considerations underlying the decision:
- Inflation expectations for the coming year, based on various sources, are below the midpoint of the inflation target range. Actual inflation over the past 12 months is slightly above the midpoint of the targetThe first estimate of National Accounts data for the second quarter was impacted by the start of natural gas production, and indicated GDP growth of 5.1 percent. Assessments of economic activity are that activity net of the effect of the start of natural gas production continues to expand at a rate similar to that of the past two years, as the increase in domestic demand, particularly in private consumption, offsets the decline in exports. The labor market remains stable.
- A slow improvement can be seen in real activity of advanced economies, and there is continued moderation in some emerging economies.
- The effective exchange rate of the Shekel remained unchanged at the end of the month, after its appreciation trend of recent months.
- Central banks of advanced economies did not change their interest rates this month (except for an interest rate reduction in Australia). Central banks in the US, Japan, and the eurozone continue their quantitative easing policies. It is generally assessed that the Fed will begin tapering this year. Uncertainty regarding the exact timing of the start of the process, its strength, and its consequences is expected to increase financial market volatility.
- Home prices, which are published in the Central Bureau of Statistics survey of home prices but are not included in the CPI, began to increase again, and previous data were revised upward. Mortgages continued to be taken out in large volumes. In order to reduce the risk to mortgage borrowers and to the banking system, the Supervisor of Banks published draft guidelines which limit the share of repayment out of income, the share of the loan which may be granted at variable rate interest, and the term until final loan repayment.
Against the background of these considerations, the Monetary Committee was of the opinion that the current interest rate level is in line with economic conditions, and decided to keep the interest rate unchanged this month.
The Bank of Israel will continue to monitor developments in the Israeli and global economies and in financial markets, particularly in light of the continuing uncertainty in the global economy. The Bank will use the tools available to it to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, and in this regard will keep a close watch on developments in the asset markets, including the housing market.
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The minutes of the monetary discussions prior to the interest rate decision for September 2013 will be published on September 9, 2013.
The decision regarding the interest rate for October 2013 will be published at 15:00 on Monday, September 23, 2013.