Bank of Israel - Press Releases - The Monetary Committee decides on August 23, 2021 to keep the interest rate unchanged at 0.1 percent
Central bank: boi | Type: statement | Date: 2021-08-23

vThe various indicators
regarding the period prior to the recent worsening of morbidity showed that the
level of activity had returned to its long-term trend in most industries, but
activity was still below the trend in the vulnerable in-person industries.
vGDP grew in the second
quarter by a high annualized rate of 15.4 percent. In addition, the Central
Bureau of Statistics revised historical GDP data upward. This combination led
to an output gap in the second quarter of about 3 percent, lower than the
previous assessment, which was 4.5 percent.
vLabor market data continue
to return toward their precrisis levels. The number of job vacancies continued
to increase, continuing to the trend since the beginning of the year, and the
employee hiring constraint reported by firms continues to weigh on the
expansion of activity. However, the ratio of unemployed persons to the number
of job vacancies varies markedly among the geographic regions in Israel
vThe upward trend of
inflation continues. Inflation in the past 12 months is 1.9 percent. Inflation
expectations for the coming year are within the target range, and declined
slightly. Expectations derived from the capital market, and those of inflation
contracts, are at the midpoint of the target range, while those of inflation
forecasters are lower. Medium- and long-term inflation expectations from the
capital markets remained anchored at the midpoint of the target range.
vSince the previous interest
rate decision, the shekel strengthened by 0.6 percent against the US dollar, by
1.5 percent in terms of the effective exchange rate, and by 2.2 percent against
the euro.
vHome prices increased
rapidly, by 7.6 percent, in the past 12 months. Alongside this, the pace of
rental price increases remained relatively moderate.
The Israeli economy’s process of recovery
from the crisis continues. However, there are still challenges to economic
activity in view of the increased health risks in Israel and abroad. The
Committee will therefore continue to conduct a very accommodative monetary
policy for a prolonged time, using a range of tools as necessary, including the
interest rate tool, in order to continue supporting the attainment of the
policy targets and the recovery of the economy from the crisis, and to ensure
the continued orderly functioning of the financial markets.
​​
Since the previous monetary
policy decision, there has been a significant increase in morbidity due to the
spread of the “Delta variant” of the COVID-19 virus. In particular, there has
been an increase in the number of seriously ill patients. These have led to
government decisions to tighten limitations placed on economic activity: “Green
Badge” and “Purple Badge” regulations have been reimposed in most industries,
and the restrictions on those returning from abroad have been tightened. Alongside
this, the third vaccination process is underway. The vaccination process is
expected to help lower serious morbidity, and thereby lead to a reduction in
the expected impact on the economy. However, the increase in morbidity, the
pace of decline in the effect of the vaccination, and the ramifications
thereof, have added a large measure of uncertainty regarding economic activity
in the short and medium terms.
Most of the recently published
data reflect the accelerated economic recovery prior to the significant worsening
of morbidity. The indicators regarding activity continue to show that the level
of activity had returned to its long-term trend in most industries, but was
lower than the trend in the vulnerable in-person industries, particularly
tourism, hospitality, and culture. The average of credit card purchases in
July-August was around the long-term trend (Figure 6), but the level of
purchases in the tourism and restaurant industries is low (Figure 7). According
to the Central Bureau of Statistics Business Tendency Survey, the aggregate net
balance of the business sector continued to increase in July, and was at its
highest level since the outbreak of the COVID-19 crisis (Figure 4). Goods
exports (excluding ships, aircraft, and diamonds, in dollars) are higher than
they were prior to the crisis, and services exports continue to increase very
rapidly. Total capital raised by private companies in the high-tech sector
since the beginning of the year has already surpassed $15 billion, compared
with about $10 billion in all of 2020 (Figure 22). Goods imports are
high in all components.
According to the first estimate
of National Accounts data for the second quarter, GDP grew by a high annual
rate of about 15.4 percent (Figure 1). Private consumption grew sharply
by 36.3 percent, exports (excluding diamonds and startups) increased by 14
percent, and investment increased by 9.3 percent due to increases in industrial
investment and in residential construction investment. The sharp increase in
uses is also reflected in imports (excluding defense, ships and aircraft, and
diamonds), which grew by 17.6 percent (Figure 2). In addition, first
quarter growth was revised upward.
In addition, according to a
Central Bureau of Statistics revision of historical GDP data, nominal GDP in
2020 was about one percent higher than previous publications stated, and the
historical growth rates prior to the crisis, from which the potential growth
rate is derived, were higher than previous assessments. Even so, according to
an analysis by the Bank of Israel Research Department, the combination of these
corrections leads to an output gap of about 3 percent in the second quarter of
2021, lower than the previous assessment of 4.5 percent (Figure 3).
Labor market data are continuing
their trend of return to the precrisis situation. Labor Force Survey data for
July indicate a decline in the broad unemployment rate to a monthly average of 8.4
percent, and even lower in the second half of the month. (Figure 10). Since
the exit from the third lockdown, there has also been an increase in the
adjusted employment rate (according to which COVID-19 absentees are not
considered employed; ages 15+), to 58.4 percent in July, while in 2019, prior
to the crisis, the rate was about 61 percent (Figure 11). The number of
employed persons aged 15+ in July was about 185,000 lower than the number of
employees required to attain the 2019 average employment rate. The number of
job vacancies continued to increase, further to the trend since the beginning
of the year (Figure 12), and according to the Business Tendency Survey, the
employee hiring constraint continues to weigh on the expansion of activity,
particularly in the hotels, manufacturing (professional employees), and
services industries (Figure 14). However, the ratio of unemployed
persons to the number of job vacancies varies markedly among the geographic
regions in Israel(Figure 13).
The upward trend in inflation
continued. The CPI increased by 0.4 percent in July, and inflation in the past
12 months is 1.9 percent (1.7 percent net of energy and fruits and vegetables;Figure
17). Inflation in the nontradable components continues to increase, led by
items that were impacted by the opening of the economy. The increase in the
prices of tradable goods was stable (Figure 18). The price increases
encompass a greater number of components in the CPI. Inflation expectations for
the coming year are within the target range, and declined slightly. Expectations
derived from the capital market and from inflation contracts are at the
midpoint of the target range, while those of professional forecasters are lower
(Figure 19). Medium- and long-term expectations remain anchored at the
midpoint of the target range (Figure 20). The Monetary Committee is
closely following these developments, and its assessment is that there is no
concern of an inflationary outbreak.
Since the previous interest rate
decision, the shekel strengthened by 0.6 percent against the US dollar, by 1.5
percent in terms of the effective exchange rate, and by 2.2 percent against the
euro (Figure 21).
Home prices increased by 7.6
percent in the past 12 months (Figure 26), a more rapid pace than in
previous years, in view of the moderation in the number of building starts and
in the number of building completions in the past year. The increase in housing
prices in recent months has been accompanied by an increase in the prices of
construction inputs. Total transactions in May remained high. In the past year,
investors sold dwellings at a volume similar to their purchases, after having been
net sellers in previous years. Alongside this, the pace of rental price
increases remained relatively moderate. The volume of new mortgages taken out
in July was similar to the record set in June, further to the high mortgage
volumes since the beginning of the year (Figure 27).
In the capital market, the Tel
Aviv 125 index increased slightly relative to parallel indices abroad, and
corporate bond spreads increased slightly but remained very low (Figure 25).
Government bond yields declined slightly, mainly in the long portions, similar
to the global trend. The credit market continues to function well, with stable
and low interest rates (Figures 29 and 30). According to the Central Bureau
of Statistics Business Tendency Survey, reported financing difficulties among
businesses of various sizes are returning to levels similar to those that were
prevalent prior to the crisis (Figure 28).
The recovery in the global
economy continues, but there is growing concern that the “Delta variant” will
lead to an increase in morbidity and a return of restrictions, and will thereby
lead to a slowdown in activity and deepening difficulties in the global production
chain. GDP data for the second quarter indicated continued global recovery, led
by the advanced blocs, chiefly the United States. The IMF’s global growth
forecast for 2021 remained unchanged at 6 percent (Figure 31). However,
according to the IMF, a significant spread of morbidity in the world will delete
about 0.8 percent from global growth in both 2021 and 2022. The global
purchasing managers indices for July continue to indicate economic expansion (Figure
33). The volume of world trade is at high levels of activity. Equity
indices in the US and Europe continued to increase, while in contrast, equity
indices in the emerging countries and in east Asia declined in view of the
increase in morbidity, movement restrictions, and regulatory changes in China. Oil
prices declined and commodity prices increased. Oil is trading at close to its
precrisis price, but its price is still about 40 percent higher than it was 12
months, so that it is still expected to support inflation in the coming months.
The global inflation environment continues to increase (Figure 34), but
according to most assessments, a significant portion of the increase is not
expected to persist (Figure 35). The US economy grew by 6.5 percent in
the second quarter compared to the previous quarter in annualized terms. Sentiment
data continue to indicate expansion, and July employment figures were better
than expected. In the eurozone, GDP grew by about 8.2 percent in annual terms compared
to the previous quarter, following two quarters of contraction. In China, GDP
grew by about 5.3 percent in annual terms compared to the previous
quarter—lower than the average in the precrisis years. In addition, activity
data indicate a slowdown in the pace of activity. Monetary policy in the major
economies remained very accommodative. The major central banks left their
interest rates unchanged and did not change their purchase programs. However,
the Fed emphasized progress in attaining the goals of the accommodative
monetary policy, and it will consider the continuation of that policy at its
coming meetings. Furthermore, there were interest rate increases in a number of
developing economies in which there are significant inflationary pressures.
The minutes of the monetary discussions prior to this interest rate
decision will be published on September 6, 2021. The next decision regarding
the interest rate will be published at 16:00 on Thursday, October 7, 2021,
followed by a press briefing by the Governor.