Bank of Israel - Press Releases - The Monetary Committee decides on October 19, 2017 to keep the interest rate unchanged at 0.1 percent
Central bank: boi | Type: statement | Date: 2017-10-19

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.
For the file of data accompanying this notice,click h​ere.
The inflation
environment remains very low. Following a sharp decline in inflation in
previous months, the change in the CPI readings for August and September was
positive. As a result, inflation over the past 12 months has increased, to 0.1
percent (Figure 1 in the data file). Although the pace of increase in
the housing component moderated, that component remains the main contributor to
positive inflation. In recent months, energy prices have also made a positive
contribution. A variety of other components have made negative contributions to
inflation, which supports the assessment that the inflation rate reflects the
increasing competition in some industries and changes in consumer behavior,
and, to a lesser extent than in the past, the price reductions initiated by the
government(Figure 2). The cumulative appreciation of the shekel in the
past year, as well as moderation of inflation abroad, are reflected in the
negative level of inflation in the prices of tradable goods(Figure 3). Wage
increases in the economy have, in the past year, started to be reflected in an
increase in unit labor cost, and are expected to contribute to a return of
inflation to within the target range. The low inflation environment is also
reflected in the stability of short-term expectations from the various sources
below the target range(Figure 4), while long-term expectations are
anchored within the target range(Figure 5). The Research Department’s
assessment is that inflation is expected to be 1 percent in the coming year
(ending in the third quarter of 2018).
Since the
previous interest rate decision, there was no significant change in nominal long-term
government bond yields, so that the spread between them and the parallel US
government bonds remained at a negative low(Figure 6), although real
yields in Israel are similar to US yields and higher than those in Europe.
Yield spreads between corporate and government bonds remained very low.
Indicators of
economic activity remain positive and indicate solid growth in the third
quarter, according to initial data from the Companies Survey(Figure 11),and
the high levels of the Consumer Confidence Index and the Purchasing Managers
Index, despite some moderation in private consumption relative to the rapid
increase it showed in 2016. The slowdown in goods exports end data is a result
of volatile factors (Figure 12), and a recovery of exports is apparent
over time, with an emphasis on services exports. Labor market data continue to
support the assessment of full employment, which is what led to moderation in
growth relative to 2016. The participation and employment rates are high, and there
was a further decline in the unemployment rate(Figure 13)which, it is
worth noting, encompasses all levels of education(Figure 14), with
stability at a high level in the number of work hours per employee and a record
high level in the job vacancy rate. Wage increases moderated slightly in recent
months, after accelerating in previous months. According to the Research
Department’s updated staff forecast, GDP is expected to grow by 3.1 percent in
2017 and by 3.3 percent in 2018.
Housing market
data continue to indicate moderate demand and a slowing of activity, but home
prices continue to increase at a relatively moderate rate (Figure 8). The
number of transactions remains moderate. In recent months, the pace of new
mortgages taken out stabilized following a prolonged decline, with a moderate
decline in the mortgage interest rate(Figure 9).
Global economic
activity is improving, and world trade is growing at a stronger pace (Figure
17). The IMF raised its growth forecast for all of the major economies and
for world trade (Figure 16), but noted that while the short-term risks
of a deviation from the forecast are balanced, medium-term risks are toward a
worsening of growth, with an emphasis on financial and geopolitical risks.
Inflation in most major economies remains below target (Figure 19). In
the US, the positive trend in economic activity apparently continued in the
third quarter, despite interruptions in activity, which are apparently
temporary and limited in scope, as a result of extreme weather. The administration
presented a detailed plan for reducing taxes, but there is still uncertainty
regarding the format and timing in which it will be realized. The Fed announced
that it would begin to reduce its balance sheet this month, and assessments are
that the federal funds rate will be raised once more in December. In Europe, the
entrenchment of growth is continuing, with the improvement encompassing both
core and peripheral economies. At this stage, political developments in Spain
are not undermining stability. Assessments are that when the ECB extends its
bond purchasing program, it will announce a gradual reduction in its volume. In
Japan, growth figures for the second quarter were revised downward, but they
remain significantly higher than the potential growth rate, and the positive
momentum apparently continued into the third quarter. In China there was a
slight slowdown in growth in the third quarter. Oil prices increased by about
10 percent since the end of August.
The minutes of the monetary discussions prior to this interest
rate decision will be published on November 2, 2017.
The next decision regarding the interest rate will be
published at 16:00 onMonday, November 27, 2017.