Bank of Israel - Press Releases - The Monetary Committee decides on February 21, 2022 to keep the interest rate unchanged at 0.1 percent
Central bank: boi | Type: statement | Date: 2022-02-21

The Israeli economy recorded high growth alongside the COVID-19
virus, and various indicators point to continued strong activity.  The Committee’s assessment therefore is that in
the coming months, conditions will allow for the start of a gradual process of
raising the interest rate in line with the path of inflation and the pace of
growth and employment, in order to continue supporting the achievement of the
monetary policy goals and to ensure the continued proper functioning of the
financial markets.
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The ongoing economic activity in Israel continues at a high level
alongside the COVID-19 pandemic and the cyclical nature of the waves of
morbidity.  This has been possible, in
part, thanks to the adaptation of most industries to functioning alongside the
pandemic.  The fifth wave is in a clear
decline in Israel. However, the risks of further morbidity cycles and the
parallel development of new strains of the virus in the future remain, and are
leading to continued uncertainty regarding the expected intensity of economic
activity in the short and medium term.
Since the previous interest rate decision, the CPI increased by 0.3
percent in December and by 0.2 percent in January.  Inflation in Israel is around the upper bound
of the target range, and was 3.1 percent in the past 12 months (Figure 1).  Net of energy and fruits and vegetables,
inflation is 2.7 percent, and net the effects of taxation and regulation, it is
2.4 percent (Figure 2).  The
annual pace of inflation in both the nontradable and the tradable components
increased in recent months (Figure 3). 
Inflation expectations for the coming year from most sources increased,
but are within the target range (Figure 4).  The professional forecasters project that
inflation will remain around the upper bound of the target range in the coming
months, and is then expected to decline toward the midpoint of the range.  In February, the government announced a
number of measures to deal with the cost of living, and according to an
analysis by the Bank of Israel Research Department, they are expected to
directly contribute to a decline of about 0.2 percentage points in inflation.  Expectations for the second year derived from
the capital market increased during the reviewed period to above the target
range, but expectations from the third year onward are within the target
range.  Expectations for the longer terms
declined compared to those published with the previous decision, and are around
the midpoint of the target range (Figure 5).  The Monetary Committee continues to closely
monitor these developments, and maintains its assessment that there is no
concern of an inflationary outbreak. 
Since the previous monetary policy decision, the shekel has weakened by
3.3 percent against the US dollar, by 3.4 percent in terms of the nominal
effective exchange rate, and by 3.5 percent against the euro (Figure 6).
Despite the high morbidity level and the
increased number of people in isolation, economic activity continues apace in
most fields.  According to the first
estimate of National Accounts data for the fourth quarter, GDP in 2021 grew by
8.1 percent—exceeding the forecast growth—and per capita GDP grew by 6.3
percent.  In the fourth quarter, GDP
jumped by 16.6 percent (seasonally adjusted in annual terms;Figure 13).  For the first time since the start of the
COVID-19 crisis, the GDP level crossed the precrisis trendline (Figure 15).  Strong fourth-quarter growth was registered in
all areas of GDP.  In parallel, the
Central Bureau of Statistics revised 2021 third-quarter growth upward from 2.7
percent to 6.7 percent.
The aggregate balance of the Central
Bureau of Statistics Business Tendency Survey for January remains in positive
territory despite the declines in recent months (Figure 16).  Total credit card purchases in January and
February remained similar to the previous two months, and despite the increase
in morbidity rates, there was no significant decline in overall consumption (Figure
17).  At the beginning of the Omicron
wave, there were some declines in purchases in industries that were hard bit by
the crisis, but it is clear that the trend of recovery in those industries is
continuing.  In view of the continuing
global supply chain difficulties, the intensity of the equipment and raw
materials constraint reported by companies remained high.  Goods exports (excluding ships, aircraft, and
diamonds) remain higher than before the crisis, and services exports remain
very high (Figure 18).  Goods
imports are also high in all components (Figure 19).
Labor market data for January indicate
stability in the general employment level, and are not far from the precrisis
levels.  Even at the peak of the Omicron
wave, the employment indices remained stable in the second half of
January.  However, there was a decline in
actual labor inputs due to the high number of employees in isolation.  The average number of employees who were
absent from their workplace for an entire week in January was about 70,000
higher than the December average.  The
broad unemployment rate declined to 5.6 percent in January (Figure 20).  The adjusted employment rate remained
virtually unchanged, at 60.2 percent, reflecting a gap of about 65,000
employees (0.9 percentage points) from the average employment rate in 2019 (Figure
21).  The number of job vacancies
remained high in January (Figure 22). 
Despite the fact that the general employment environment is close to its
precrisis state, there has been a change in the industry mix of employment
relative to the situation in 2019.  In
recent months, most business sector industries have remained in states of
underemployment, while employment in the healthcare, information, and
communications industries has expanded beyond the employment trends that were
expected prior to the crisis (Figure 23).  The average wage in the economy increased in
line with the precrisis trends, as did the average wage after neutralizing the
effect of the employee composition that was typical of the COVID-19
period.  However, there is some
acceleration in the pace of increase in wages in the construction and
information and communications industries.
The upward trend in home prices
accelerated in recent months, with prices rising by 11.3 percent in the past 12
months (Figure 9), a significantly higher pace than in previous
years.  Investors increased the pace of
their purchases in October and November, prior to the increase in the purchase
tax, and decreased their purchases thereafter (Figure 11).The volume of
new mortgages taken out in January declined relative to data from the end of
2021, but remained high by historical comparison (Figure 10).  Alongside this, the annual increase in rents
remained relatively moderate.
There were declines in equity prices on
the domestic capital market, similar to the global trend, alongside a more
moderate increase in government bond yields. 
Corporate bond spreads also increased, but remained at low levels.  According to the Central Bureau of Statistics
Business Tendency Survey, financing constraints among businesses of various
sizes remained similar to precrisis levels. 
However, in December–January, in view of the spread of the Omicron
morbidity wave, there was some increase reported in financing constraints among
small businesses (Figure 12).
The Omicron variant’s impact on the global
economy has been relatively moderate, and the recovery trend in economic
activity continues.  Many countries are
easing the restrictions they have imposed, and some are even removing them
almost completely.  The interruptions in
the global production chains continue, although with slightly less
intensity.  The International Monetary
Fund revised its global growth forecast downward, and expects growth of 4.4
percent in 2022 (Figure 27).  The
global purchasing managers index declined in view of the outbreak of the
Omicron variant, but remains at a level indicating economic expansion (Figure
29).  The volume of world trade
increased slightly, and is at a very high level (Figure 28).  Equity indices in the advanced economies
recorded price declines with high volatility. 
There was an increase in government bond yields in view of the increase
in expectations of monetary tightening. 
Oil and other commodity prices increased in view of the tension in
eastern Europe.  The global inflation
environment continues to increase. The inflation indices in most countries are
higher than the central bank targets, and in some of them, core inflation is
also above the target.  Monetary
tightening around the world therefore continues.  In the US, GDP grew by a rate higher than
expected in the fourth quarter, and the labor market remains tight.  The Federal Reserve left the federal funds
rate unchanged, but continued to cut the amounts to be purchased in its
government bond and mortgage-backed securities purchasing program, so that the
programs are expected to draw to a close in March.  The Fed also announced its intention to
reduce its balance sheet and to begin a process of raising the interest rate in
view of the further increase in the inflation rate (in CPI terms) to an annual
rate of 7.5 percent.  In Europe, the
increase in annual inflation continued, to 5.1 percent.  The European Central Bank left its interest
rate unchanged, but there are increasing assessments in the eurozone that the
ECB will begin raising its interest rate later in the year.  Inflation in the UK continued to increase,
reaching 5.5 percent.  The Bank of
England again increased its interest rate to 0.5 percent.  In a number of other countries where
inflation is above the central bank target, there were also increases in the
interest rates (Figure 33).
The minutes of the monetary discussions prior to this interest rate
decision will be published on March 7, 2022. The next decision regarding the
interest rate will be published at 16:00 on Monday, April 11, 2022, followed by
a press briefing with the Governor.​​​​​