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Background conditions
Inflation data: The Consumer Price Index (CPI) declined by 0.2 percent in February, in line with forecasters’ projections. Components with marked declines were food, clothing and footwear, and communications (as mobile communications prices continued to decline). These were offset primarily by increases in the housing and fruit and vegetable components. The rate of inflation over the preceding 12 months continues to decline, and was 1.2 percent in February, compared with 1.4 percent over the 12 months ending in January.
Inflation and interest rate forecasts: Private forecasters’ inflation projections for the next 12 CPI readings were unchanged this month, and average 1.6 percent. Inflation expectations derived from the capital market declined to 1.6 percent, and expectations for the next 12 CPI readings derived from banks’ internal interest rates declined to 1.2 percent. The inflation path projected by some forecasters indicates that it is likely that the annual rate of inflation will decline to below the target during 2014, and will return to it toward the beginning of 2015. Inflation expectations for medium and long terms did not change markedly this month, and remain slightly above the midpoint of the inflation target range. Private forecasters do not expect a change in the interest rate in the coming three months, but data derived from the Telbor interest rates and the makam curve indicate some probability of one reduction in the Bank of Israel interest rate in the coming months.
Real economic activity: Data that became available this month continue to indicate that the economy is growing at a moderate pace, with some recovery in the first quarter and change in the composition of growth. In the second estimate of National Accounts data for the fourth quarter of 2013 (seasonally adjusted, annual terms), growth of business sector product was revised from 1.6 percent to 2.1 percent, though this is primarily a result of a downward revision of the level of business sector product for the third quarter. In February, there was a slight decline of 2 percent in goods exports (excluding ships and aircraft and diamonds). With that, against the background of an increase in world trade, a trend of growth in exports is becoming apparent over time, as a result of an increase in exports and production of high technology industries. Other manufacturing exports remain at a virtual standstill. In recent months there has been a continued trend of growth in exports to Asia, reaching an average of about $1 billion per month. In January, there was an atypical increase of 5.4 percent in business services exports (excluding start-up companies). Imports (excluding ships, aircraft, diamonds, and energy products) declined by about 2.5 percent in February, and the trend of increase in raw materials imports halted. In 2013, there was a current account surplus of $7 billion, of which $2.2 billion was in the fourth quarter. The Composite State of the Economy Index increased by 0.2 percent in February, with a marked increase in trade and services revenue indices. The Climate Index, based on the Business Tendency Survey of the Central Bureau of Statistics, reflects a monthly growth rate of 0.28 percent in the business sector. The Purchasing Managers Index for February rose above the 50 point level, considered the bound between contraction and growth of activity. The Consumer Confidence Index compiled by the Central Bureau of Statistics increased slightly this month and the index compiled by Bank Hapoalim remained unchanged; both continue to indicate pessimism among consumers.
The labor market: Labor Force Survey data for January indicate a slight increase in the unemployment rate among 25–64 year olds, to 5.4 percent, at the same time as an increase in the participation rate and the employment rate. The overall unemployment rate remained unchanged at 5.9 percent. In December there was a slight increase in the number of employee posts of Israelis in the business sector (0.25 percent) and in public services (0.14 percent). However, it is still not a change in the trend seen over the past two years, in which employment of Israelis virtually did not increase in the business sector, while it increased in public services. Nominal wages increased by 0.2 percent, and real wages declined by 0.1 percent, in October–December, compared with July–September. Health tax receipts by the National Insurance Institute, which provide an indication of total wage payments in the economy, were 4.8 percent higher in January-February, on a nominal basis, than in the corresponding two months of the previous year. After several months of decline in the number of job vacancies in the business sector, including a prolonged decline in the number of job vacancies in the construction industry, the overall figure stabilized at around 60,000.
Budget data: In February, the government’s domestic surplus excluding net credit was NIS 2.3 billion, similar to the seasonal path consistent with staying within the deficit ceiling for 2014, compared with a deficit of NIS 1.6 billion in February 2013. This sum was affected by one-time revenues of about NIS 1.4 billion in January. Tax revenues were about NIS 19.8 billion in February, about NIS 0.2 billion below the seasonal path consistent with the tax revenues projected in the budget. Gross VAT receipts on domestic production, which serve as an indication of the level of economic activity, increased by about 12 percent in real terms compared with February 2013, and excluding legislative changes the increase was about 6 percent.
Research Department staff forecast: This month the Research Department updated its macroeconomic forecast. The notice of the forecast is published in parallel with this release. According to the updated Research Department staff forecast, the inflation rate over the next 4 quarters (until the first quarter of 2015) will be 1.6 percent and the Bank of Israel interest rate is expected to remain at 0.75 percent through 2014 and to begin to be increased at a moderate rate in 2015. The staff forecast also projects GDP to increase in 2014 by 3.1 percent (3.3 percent in the previous forecast), and excluding the effect of natural gas production, to increase by 2.8 percent (2.9 percent in the previous forecast); in 2015, GDP is expected to grow by 3 percent—natural gas production is expected to stabilize and thus is not projected to contribute to GDP growth in that year.
The foreign exchange market: From the monetary policy discussion on February 23, 2014, through March 21, 2014, the shekel appreciated by 0.9 percent against the dollar and by 0.3 percent against the euro. In terms of the nominal effective exchange rate, the shekel strengthened by about 1 percent this month, and by about 8.2 percent since the beginning of 2013.
The capital and money markets: From the monetary policy discussion on February 23, 2014, through March 21, 2014, the Tel Aviv 25 Index increased by 4.6 percent, a greater return than the trend in advanced economies. Government bond yields declined, on the unindexed and CPI-indexed curve, by a rate similar to the global trend—against the background of, among other things, the reduction in the Bank of Israel interest rate in the previous month. The yield to maturity on a 10-year unindexed bond declined by 17 basis points to 3.41 percent. The yield differential between 10-year Israeli government bonds and 10-year US Treasury securities declined to 66 basis points. Makam yields declined by about 25 basis points along the entire curve, against the background of the interest rate reduction in the previous month, and the 1-year yield is 0.64 percent. Israel's sovereign risk premium as measured by the five-year CDS spread declined slightly to around 90 basis points. The Tel-Bond 60 Index increased by 1.5 percent.
The money supply: In the twelve months ending in February, the M1 monetary aggregate (cash held by the public and demand deposits) increased by 17.0 percent, and the M2 aggregate (M1 plus unindexed deposits of up to one year) increased by 7.3 percent.
Developments in the credit markets: Total outstanding debt of the business sector increased by about NIS 1.5 billion (0.2 percent) in January, to NIS 780 billion, primarily as a result of debt raised through bond issuances and direct loans from institutional investors. The funds raised were partly offset by bank credit repaid. In February, there was unusually large bond issuance volume, of NIS 5.3 billion, by the business sector, primarily resulting from a large issue of foreign currency-indexed bonds by one company. Corporate bond market spreads remained low from an historical perspective, and in the construction and real estate industry there was an additional decline in spreads.  Outstanding household debt increased by about NIS 0.6 billion (0.1 percent) in January, to about NIS 410 billion at month end. Most of the increase was in housing credit, offset by, among other things, a decline in CPI-indexed credit due to the CPI decline. In February, new mortgages taken out totaled NIS 4.2 billion, similar to the monthly average for 2013. The trend of decline continues in new mortgages’ risk characteristics—the loan to value ratio, the payment to income ratio, and the share of mortgages granted at variable rate interest. In February, the average interest rate on new mortgages taken out was stable on all indexation tracks, after declining in December and January.
The housing market: The housing component of the CPI (based on residential rents) increased by 0.3 percent in February. In the 12 months ending in February, this component increased by 3.1 percent, compared with an increase of 2.4 percent in the 12 months ended in January. Home prices, which are measured in the Central Bureau of Statistics survey of home prices but are not included in the CPI, increased by 0.1 percent in December-January, and previous indices were revised downward. Over the 12 months ending in January, prices increased by 6.3 percent, compared with an increase of 8.0 percent in the 12 months ended in December. The stock of unsold homes remained stable in January. The increase in construction industry activity continued—in 2013 there were 44,300 building starts (an increase of 3.4 percent from 2012), and 42,000 building completions (an increase of 11.8 percent compared with 2012). The housing market policy measures being discussed are likely to lead to volatility in volumes of activity and in prices in the market in coming months.
The global economy: The OECD forecasts continued recovery in advanced economies and in world trade, though a global recovery is expected to remain moderate against the background of weakness in emerging markets. In the US, the rate of economic growth in the fourth quarter was revised downward, and data published this month were mixed, still against the background of harsh weather. The stronger-than-expected increase in the number of nonfarm payrolls, the increase in nominal wages, and various indicators pointing to increased demand for workers were all notable positives. Although the unemployment rate increased by 0.1 percent this month, to 6.7 percent, the civilian labor force participation rate was stable, which may indicate the return to the labor market of individuals who had become discouraged about the possibility of finding work. Notable to the downside were the balance of trade, real estate data, and the Purchasing Managers Index. The Fed continues the process of tapering its asset purchases, and announced that it would consider a wide range of data as the basis for a decision on when to increase the federal funds rate. The interest rate path expected by FOMC members increased compared with the previous meeting, and the rate is expected to reach 1 percent at the end of 2015. In Europe, macro data were mostly positive this month—purchasing managers indices increased by more than expected, and retail sales increased. In contrast, the unemployment rate remained elevated and business credit continued to decline. The ECB revised its growth forecast for 2014 slightly upward, to 1.2 percent. Concern over deflation remains, but it is assessed that the central bank will not act against it in the coming months. With that, the ECB president noted that the interest rate is expected to remain at its current level, or lower, for an extended period of time. Yields continued to decline in Spain and Italy. In Japan, strong growth is projected for the first quarter, but growth is expected to be negative in the second quarter, against the background of a VAT increase which will come into effect in April. In China, macro data indicated relative weakness, and uncertainty increased over the need for structural changes and credit market developments. In India, macro data pointed to recovery, and data were mixed in Brazil. However, overall capital outflows from emerging markets continued. The uncertainty about the situation in Ukraine is liable to impact on European economies, and so far it has been reflected in price declines of equities in Europe. This month, the price of a barrel of oil (Brent crude) declined by 3.2 percent, and the metals index declined by 5 percent. The agricultural commodities index increased by 5.5 percent, against the background of severe weather conditions in many countries worldwide.
The main considerations behind the decision
The decision to keep the interest rate for April 2014 unchanged at 0.75 percent, after it was reduced last month, is consistent with the Bank of Israel's monetary 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:


  • The CPI for the month of February declined by 0.2 percent. The inflation environment is located within the bottom portion of the target range, and it is likely that over the next several months, inflation over the preceding 12 months will decline temporarily to below the target range, though it is expected to return to within the target toward the beginning of 2015. Inflation expectations for one year ahead are within the target range, below the midpoint of the inflation target.
  • Data which became available this month continue to indicate moderate economic growth, and some recovery in the growth rate is seen in the first quarter of 2014. In particular, a recovery in private consumption is apparent, as well as some increase in exports, which is focused for now on high tech and business services industries. Other manufacturing exports remain at a virtual standstill. Labor Force Survey data indicate elevated employment and low unemployment, derived from structural factors as well; the increase in the number of employee posts in the business sector remains moderate.
  • In the past month, the shekel appreciated by 1 percent in terms of the nominal effective exchange rate; since the beginning of 2013, there has been a cumulative appreciation of 8.2 percent.
  • There is a renewed trend of growth in world trade, and the global economy is expected to continue to grow moderately. Mixed data were reported in the US this month, primarily against the background of severe weather, but the tapering process continues and the interest rate path projected by FOMC members rose, reflecting an expectation for continued recovery. In Europe, the growth forecast was revised slightly upward. Weakness remains apparent in emerging markets.
  • The pace of home price appreciation moderated this month, and over the past year they have increased by 6.3 percent. There is a continued high volume of mortgages taken out. With that, the improvement in risk characteristics of the new mortgages continues. The housing market policy steps being considered are likely to lead to volatility in volumes of activity and in prices in the market in coming months.


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.
The minutes of the monetary discussions prior to the interest rate decision for April 2014 will be published on April 7, 2014.
The decision regarding the interest rate for May 2014 will be published at 17:30 on Monday, April 28, 2014.