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Background conditions

Inflation data:
The Consumer Price Index (CPI) for September was unchanged, compared with projections for an increase of 0.2 percent, on average. The CPI was primarily influenced by an increase in the food excluding fruit and vegetables component, which was offset by declines in the housing, clothing and footwear, and furniture components. The rate of inflation measured over the preceding 12 months is 1.3 percent, similar to last month.

Inflation and interest rate forecasts:
Inflation expectations from various sources declined slightly, compared with the previous month. Private forecasters’ inflation expectations for the next 12 CPI readings declined to 1.7 percent, on average. Inflation expectations derived from the capital market remained essentially unchanged, at 1.5 percent, while expectations for the next 12 CPI readings derived from banks’ internal interest rates were 1.3 percent. Forward expectations for terms of 2–3 years (monthly averages) increased slightly this month, to 2.8 percent; expectations for medium terms remained stable at 2.4 percent, and for terms of 8–10 years there was a slight decline, to 2.0 percent. Based on projections of most private forecasters, as well as on data inherent in the Telbor interest rate and the makam curve, no change is expected in the Bank of Israel interest rate in the coming three months.

Real economic activity:
The picture of the state of real economic activity is similar to that of the previous month—continued growth at a rate slightly below 3 percent (excluding the effect of natural gas production), although several indicators point to some slowdown, primarily in exports, in the third quarter. The Composite State of the Economy Index for September increased by 0.3 percent, among other things against the background of the increase in imports and the effect of beginning natural gas production from the Tamar reservoir, and despite a prolonged decline in the industrial production index. Goods exports (excluding ships, aircraft, and diamonds) remained unchanged in September, and declined by 10 percent in the third quarter, compared with the second quarter, deriving primarily from high technology industries. Similarly, an employment weighted exports index, which gives a higher weight to labor intensive industries, indicates an extended trend of moderation since the middle of 2011. Exports of business services (excluding start-ups) declined by 4 percent in July, compared with June. The Purchasing Managers Index continues a trend of decline, and in September it reached 44.9 points. This, while Bank Hapoalim’s Consumer Confidence Index increased for the fourth consecutive month, against the background of gains on the capital market and continued stability in the labor market. According to an index based on Google searches, there was an increase this month in the probability that domestic demand will increase faster than the long term rate.

The labor market:
Labor force survey data for August indicate that the unemployment rate declined by 0.1 percent, to 6.1 percent, though among the prime working ages, the rate increased by 0.2 percent, to 5.4 percent. Additionally, there was an increase in the share of those employed on a full time basis. Nominal wages increased by 1.4 percent and real wages increased by 0.6 percent in May–July, based on seasonally adjusted data, compared with February–April. Health tax receipts by the National Insurance Institute, which provide an indication of total wage payments in the economy, were 4.7 percent higher in August–September, on a nominal basis, than in the corresponding two months of the previous year. Over time, a declining trend can be noted in their rate of growth. In July, there was an increase of 0.3 percent in the number of employee posts, though since the beginning of 2013 there has been a virtual standstill in the number of employee posts in the business sector. In September, there was a decline of 7.8 percent in the number of job vacancies, to its lowest level since the beginning of the year.

Budget data:
In January–September, the cumulative deficit in the government’s domestic activity was NIS 12.6 billion below the seasonal path consistent with the deficit ceiling for 2013 of 4.65 percent of GDP. The below-path deficit reflects an expenditure level which is NIS 8.7 billion lower than the path consistent with full performance of budget expenditures, and revenues which are NIS 3.9 billion above the path consistent with the revenues estimated in the budget. Assuming that there will be some increase in expenditure levels relative to the budget approved by the Knesset, the deficit in 2013 is expected to be in the range of 3.5–4.0 percent of GDP.

The foreign exchange market:
From the monetary policy discussion on September 22, 2013, through October 25, 2013, the shekel weakened by 0.7 percent against the dollar, even as most currencies strengthened against the dollar. The shekel weakened by 2.66 percent against the euro, and by 1.5 percent in terms of the nominal effective exchange rate. Since the beginning of the year, the shekel has appreciated by 5.3 percent in terms of the effective exchange rate.

The capital and money markets:
From the monetary policy discussion on September 22, 2013, through October 25, 2013, the Tel Aviv 25 Index increased by 3.3 percent, similar to the global trend. Government bond yields declined along the entire curve, and the yield to maturity on a 10-year unindexed bond declined from 3.84 percent to 3.56 percent. The yield differential between 10-year Israeli government bonds and equivalent 10-year US Treasury securities declined slightly, to only 105 basis points. Makam yields declined along the entire curve, primarily against the background of the interest rate reduction last month, and the 1-year yield declined during the period to only 0.9 percent. Israel's sovereign risk premium as measured by the five-year CDS spread declined slightly, from 117 basis points to only 108 basis points. The Tel-Bond 60 Index increased slightly, by about 1 percent. At the same time, spreads in the corporate bond market remained low.

The money supply
: In the twelve months ending in September, the M1 monetary aggregate (cash held by the public and demand deposits) increased by 14.1 percent, and the M2 aggregate (M1 plus unindexed deposits of up to one year) increased by 5.4 percent.

Developments in the credit markets
: The total outstanding debt of the business sector increased by about NIS 4.8 billion in August, to NIS 786 billion, (an increase of 0.6 percent). The increase derived primarily from the depreciation of the shekel against the dollar, which increased the shekel value of foreign currency denominated debt, and from the increase in the CPI, which increased the value of CPI-indexed debt.
Net debt raised totaled only about NIS 0.5 billion—about NIS 1.9 billion raised in tradable bonds was partly offset by approximately NIS 1.5 billion in repayment of bank loans. The private nonfinancial sector issued only about NIS 1 billion in bonds in September, compared with a monthly average of NIS 2.3 billion since the beginning of the year, against the background of seasonality related to the New Year holiday season. Outstanding household debt increased by 1.0 percent in August, to NIS 402.2 billion, with an increase of 0.9 percent in households’ housing debt, to NIS 284 billion.

In September, there was a seasonal decline to about NIS 3.5 billion in new mortgages granted by banks, compared with a monthly average of NIS 4.4 billion since the beginning of the year. The average interest rate on new unindexed, variable-rate mortgages remained virtually unchanged in September, while the interest rate on CPI-indexed mortgages increased by about 0.1 percentage points. Guidelines issued by the Supervisor of Banks which limit the payment to income ratio, the share of the loan which may be granted at variable rate interest, and the term until final loan repayment are expected to be reflected in housing credit characteristics in the coming months.

The housing market:
The housing component of the CPI (based on residential rents) declined by 0.1 percent in September, following consecutive increases each month since February. In the twelve months ending in September, this component increased by 2.7 percent, similar to the 12 months which ended in August. Home prices, which are published in the Central Bureau of Statistics survey of home prices but are not included in the CPI, increased by 0.2 percent in July–August, and over the 12 months ending in August they increased by 9.3 percent, compared with 9.8 percent in the 12 months ended in July. The number of building starts, on an annualized basis, remains above 41,000. In August, the number of transactions in the housing market declined, in line with a decline in the level of readiness to purchase a home, as reflected in the consumer confidence survey by the Central Bureau of Statistics.

The global economy:
The International Monetary Fund lowered its global growth forecast for 2013 by 0.3 percent, to 2.9 percent, and for 2014 by 0.2 percent, to 3.6 percent. In the IMF’s Global Financial Stability Report, there is a change in the mix of risks faced by the global economy. The main risk derives from effects related to the process of monetary policy in the US and other economies becoming less accommodative—should that lead to sharper than expected increases in yields, it could threaten stability, primarily in emerging markets which may face capital outflows. In contrast, the report emphasized the improved financial situation in the eurozone. Over the course of the month, concern of a fiscal crisis in the US increased, against the background of the government shutdown and the lack of an agreement to raise the debt ceiling—an agreement which was reached only at the last minute, and which will need to be discussed again in another three months. Against the background of this lack of clarity, as well as the weak employment data that were published, market assessments are that the start of the tapering process of Federal Reserve bond purchases will be postponed to the end of the first quarter of 2014. Macro data published in the US were for the most part disappointing. In Europe, for the first time in a long while, the ECB increased its growth forecast for 2013—by 0.2 percent, to a projected contraction of 0.4 percent; it also lowered its 2014 forecast by 0.1 percent, to 1 percent. Macro data were mixed; purchasing managers indices indicated slight expansion; the unemployment rate declined slightly, and industrial production and retail sales indicated continued contraction at the annual level and a slight improvement at the monthly level. Stress tests planned for the banking system are expected to indicate the need to strengthen banks’ capital, which may make it difficult to expand credit to the business sector and to entrench growth. In Japan, the expansion program is apparently leading to only a slight improvement in macro data. In most emerging markets, the slowdown in economic activity continues, against the background of stability in commodity prices and the tightening of financial conditions. With that, growth in China accelerated in the third quarter to a rate of 7.8 percent, from 7.5 percent in the second quarter; however, the IMF’s forecast indicates expected moderation in growth and also warned about risk in the credit market. Oil and metals prices increased slightly this month. Inflation forecasts in advanced economies remained low, while accelerating in emerging markets, mainly in Brazil, India and China.

The main considerations behind the decision

The decision to keep the interest rate for November 2013 unchanged at 1 percent 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:
  • Inflation over the past 12 months, and inflation forecasts and expectations for the year ahead, remain within the inflation target range, and below the midpoint of the target range.

  •  The picture of the state of real economic activity indicates continued growth at a rate slightly below 3 percent (excluding the effect of natural gas production), although several indicators point to some slowdown, primarily a decline in exports and industrial production, in the third quarter.

  •  The interest rate was reduced by a cumulative 0.75 percentage points since May, including a 25 basis point reduction last month. Both interest rate and yield gaps with advanced economies have narrowed.

  •  Last month the appreciation trend of the shekel halted, and the shekel weakened by 1.5 percent in terms of the effective exchange rate. The shekel weakened by 0.7 percent against the dollar, while most currencies strengthened against the dollar.

  •  The IMF reduced its global growth projections for 2013 and 2014. Market assessments are that the Federal Reserve will delay the beginning of the tapering process of its bond purchases until the end of the first quarter of 2014.

  •  A decline in the number of housing transactions continues, alongside the continued increase in home prices, and the high volume of new mortgages taken out. Guidelines published by the Supervisor of Banks, 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, are expected to reduce the risk to mortgage borrowers and the banking system.

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 November 2013 will be published on November 11, 2013.
The decision regarding the interest rate for December 2013 will be published at 17:30 on Monday, November 25, 2013.