Bank of Israel - Press Releases - The Monetary Committee decides on August 29, 2017 to keep the interest rate unchanged at 0.1 percent
Central bank: boi | Type: statement | Date: 2017-08-29

For the file of data accompanying this notice
Since the previous
interest rate decision, there has been a sharp decline in inflation: The rate
of inflation over the past 12 months declined to -0.7 percent(Figure 1 in
the data file). Even net of initiated price reductions, the inflation rate
is negative (Figure 2). The decline in the inflation rate does not
reflect a decrease in demand; apparently, the CPI was temporarily impacted by
technical changes in the method of measuring the clothing and footwear
component. Furthermore, the cumulative appreciation in the exchange rate to the
beginning of July (Figure 6) had a sharp impact on prices of tradable
goods (Figure 3). In addition, the enhancement of competition in the
economy is apparently preventing price increases in some industries. The wage
increases in the economy and the change in the trend of the exchange rate, to
the extent that it persists, will support inflation, while the effect of
additional initiated price reductions and the moderation of inflation worldwide
act to reduce inflation. The decline in inflation was accompanied by a decline
in 1-year inflation expectations derived from the capital market, but
forecaster’s projections, as well as medium-term and long-term forward
expectations, remained stable. Forward expectations beginning from the end of
the third year are anchored within the target range (Figure 5).
Since the
previous interest rate decision, there has been a sharp decline in long-term
government bond yields and the spread vis-à-vis US government bond yields is at
a historic low. Yield spreads between corporate and government bonds are also
at a low level (Figure 7).
The initial
estimate of National Accounts data for the second quarter indicates that the
rate of growth in the first half of 2017 (net of the effect of vehicle imports)
is somewhat moderate compared with the accelerated growth in 2016. Against the
background of the acceleration in the growth rate of world trade, exports are
growing at a solid pace as a result of the rapid expansion of services exports
(Figure 12). Growth of goods exports remains low, against the background
of the cumulative appreciation through the beginning of July. The most recent
data indicate continued growth of economic activity at a similar rate in the
beginning of the third quarter. The moderation in growth reflects supply side
constraints derived from the labor market being at full employment—the job
vacancy rate continues to increase; participation and employment rates are
stable at high levels, and unemployment is low. The wage increase in the
business sector halted in recent months (Figure 14), but the overall
wage increased by 3.9 percent in the past year, and the growth in health tax
receipts indicates that apparently wage increases are continuing.
Housing market
data continue to indicate moderate demand and a slowing of activity. From the
beginning of the year, home prices increased by a moderate rate (Figure 8),
the number of transactions remains moderate relative to 2016, and home
purchases by investors continue to decline. The monthly pace of new mortgages granted
increased slightly in the past two months, and a downward trend in the interest
rate is apparent in recent months(Figure 9).
The improvement
in global economic activity continues, and world trade is growing at a solid
pace (Figure 17). The IMF kept its global growth forecast unchanged,
while reducing the forecast for US growth and increasing the forecast for other
major blocs (Figure 16). Inflation in most major economies remains below
target (Figure 19), and major central banks did not change their
accommodative policies. US growth recovered in the second quarter, driven by
private consumption, but the difficulties encountered by the administration in
implementing its economic policy are weighing on future growth. Despite the
improvement in the labor market, the low inflation rate led to a decline in the
Fed’s expected interest rate path, and it is not clear when it will begin the
process of reducing its balance sheet. In Europe, growth is becoming
entrenched, encompassing most economies in the bloc in the second quarter, and
sentiment indices indicate continued improvement in the coming months. The low
inflation rate is expected to delay the ECB’s stepping back from its quantitative
easing. Uncertainty regarding the Brexit process continues to weigh on growth
in the UK. In Japan, there was especially high growth in the second quarter. In
China, growth remained stable, but activity data indicate a slight moderation
in the beginning of the third quarter. Oil prices increased slightly, with
fluctuations in supply.
The minutes of the monetary discussions prior to this interest
rate decision will be published on September 12, 2017.
The next decision regarding the interest rate will be
published at 16:00 onThursday, October 19, 2017, and after the
publication there will be a press briefing with the Governor.