Bank of Israel - Press Releases - The Monetary Committee decides on October 7, 2019 to keep the interest rate unchanged at 0.25 percent
Central bank: boi | Type: statement | Date: 2019-10-07

The Monetary Committee's assessment is
that in view of the inflation environment in Israel, the monetary policies of
major central banks, the slowing in the global economy, and the continued
appreciation of the shekel, it will be necessary to leave the interest rate at
its current level for a prolonged period, or to reduce it in order to support a
process at the end of which inflation will stabilize around the midpoint of the
target range, and so that the economy will continue to grow strongly. Moreover,
if necessary, the Committee will take additional steps to make monetary policy even
more accommodative. The Bank of Israel continues to monitor developments in
inflation, the real economy, fiscal policy, the financial markets, and the
global economy, and will act to attain the monetary policy targets in
accordance with such developments.
​
The inflation environment remains low. After about a year in which it
hovered in the lower portion of the target range, annual inflation has, for the
past three months, been below the target. The CPI reading for August increased
by 0.2 percent, slightly above expectations, after the readings for June and
July were markedly lower than expected. Inflation in the past 12 months was 0.6
percent(Figure 1 in the attached file of figures), while inflation
excluding energy and fruit and vegetables has been stable in the range of 0.9–1.1
percent since the beginning of the year(Figure 2). Most of the negative
contribution to the CPI in recent months came from the components that are
traditionally volatile: the fruit and vegetables component, the effect of which
is felt in the inflation of nontradable goods prices, and the travel abroad and
vehicle maintenance components, which were apparently impacted by the
cumulative appreciation of the shekel since the beginning of the year and the
decline in energy prices, and led to a continued decline in the prices of
tradable goods. In view of the decline in inflation and the appreciation of the
shekel, short-term inflation expectations also declined, and one-year
expectations are around the lower bound of the target range(Figure 4). The
Research Department's staff forecast indicates that inflation in 2020 is
expected to be 1.2 percent, 0.4 percentage points lower than the previous
forecast. In the capital markets, there was an increase in forward expectations
up to three years, and long-term expectations are anchored near the midpoint of
the target range.(Figure 5). The shekel has strengthened by 1.2 percent
in terms of the nominal effective exchange rate since the previous interest
rate decision, and by 9.1 percent since the beginning of the year(Figure 6).
The appreciation is making it more difficult to return inflation to the target
range.
Economic activity continues to grow at near its potential rate(Figure
11), and so far it seems that activity in Israel is not being adversely affected
by the negative global sentiment or by the political situation in Israel. However,
uncertainty regarding the measures to be taken by the government to reduce the
deficit increases the risk regarding developments in the domestic economy. Most
indicators, such as the Composite State of the Economy Index(Figure 12),
the sentiment index calculated from the Business Tendency Survey, initial data
from the Companies Survey(Figure 13),
and the Consumer Confidence Index, show that the economy continued to
grow in the third quarter at near its potential rate. In contrast, the
Purchasing Managers Index declined significantly in August, and indicates a
contraction of activity. The most recent data on goods exports were relatively
good, in view of improved exports of electronic components, and the trend of
growth in services exports continues. However, the Business Tendency Survey shows
some increase in the rate of companies reporting serious constraints in export
profitability, following a decline in this rate during 2018(Figure 15).The
labor market remains tight—the latest data on the employment, participation,
and unemployment rates show they increased slightly, and wage increases are continuing, led by the business
sector, although the rate of increase has slowed somewhat. The job vacancy rate
has been declining moderately for several months, but remains high. A
breakdown of the unemployed by how long they have been waiting to return to
employment, and the decline in the number of people who are involuntarily
employed part-time also indicate a tight labor market. According to the
Research Department's staff forecast, GDP is expected to grow by 3.1 percent in
2019, similar to the previous forecast. GDP growth in 2020 is expected to be
3.0 percent, similar to the long-term rate. Growth in 2020 is expected to be
about 0.5 percentage points lower than in the previous forecast, as a result of
the decline in export forecasts due to the expected slowdown in world trade,
and due to the assumption that the government will need to take certain
measures to lower the deficit.
Equity indices in Israel increased since the previous interest rate
decision, in parallel to global markets. Medium- and long-term government bond
yields increased following the previous interest rate decision, but then
declined again, similar to developments in US yields (Figure 7). Yield
spreads between corporate bonds of the nonfinancial business sector in Israel
and comparable government bonds continued the downward trend that began at the
start of the year.
In recent months, home prices increased moderately: The increase in
the past year is approximately 0.7 percent, while the rate of increase in rents
remained
stable around 2.5 percent. The number of purchases among all purchaser
types grew, led by first home buyers. Mortgage volume continued to expand, as a
result of a combination of an increase in the number of transactions and an
increase in the average mortgage level, and mortgage interest rates continued
to decline.
The risks to the global economy have increased, mainly in view of the "trade
war" and uncertainty regarding Brexit. The OECD revised its 2019 and 2020 global
growth and world trade forecasts downward(Figure 20). The deterioration
in world trade worsened(Figure 21). In the financial markets, equity price
increased(Figure 26), in view of the deepening monetary accommodation
in various markets(Figure 25). In the US, the Federal Reserve again lowered
the federal funds rate by 0.25 percentage points, and assessments in the
markets are that the interest rate may continue to decline this year. Inflation
increased slightly, but remains slightly below the target, and third quarter
growth is expected to be moderate, in addition to the slowdown that was
recorded in the second quarter. In Europe, there was a slowdown in growth, and
industrial production continues to contract, weighing particularly on the manufacturing-intensive
German economy. Inflation in the eurozone remained low, and the ECB lowered its
interest rate, as expected, by 0.1 percentage points, and adopted additional significant
accommodative measures. In Japan, second quarter growth declined in view of the
weakness of exports and investments. Growth in China continued to moderate, and
the ramifications of the trade war and the slowdown in the growth rate led the regime
to continue its monetary accommodation measures. In mid-September, oil prices increased
sharply following the attack on the Saudi oil installations, but then declined back
to its third-quarter environment(Figure 24).
The minutes of the monetary discussions
prior to this interest rate decision will be published on October 22, 2019. The
next decision regarding the interest rate will be published at 16:00 on Monday,
November 25, 2019.