Bank of Israel - Press Releases - The Monetary Committee decides on May 20, 2019 to keep the interest rate unchanged at 0.25 percent
Central bank: boi | Type: statement | Date: 2019-05-20

The Committee assesses that the rising
path of the interest rate in the future will be gradual and cautious, in a
manner that supports a process at the end of which inflation will stabilize around
the midpoint of the target range, and that supports economic activity. 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.
For the file of figures accompanying this notice, click here.​
The inflation environment remains stable above the lower bound of the target
range. The CPI for April increased by 0.3 percent, lower than pre-publication assessments,
but the indices for the three preceding months surprised to the upside. Inflation
over the past 12 months was 1.3 percent—similar to the level in recent months (Figure
1 in the attached file of figures). Inflation measured by the adjusted index
is slightly lower. Inflation in nontradables, a proxy for the domestic
component of inflation, remains above the 2 percent level, and inflation in
tradables increased from negative levels to near zero. One-year inflation
expectations and forecasts are slightly above the lower bound of the target
range, and following the publication of the April CPI, there was a slight
decline (Figure 4). Medium-term and long-term forward expectations remain
around the midpoint of the target range, but expectations for the second year
declined slightly (Figure 5). Since the beginning of the year, the shekel
has strengthened by 4.6 percent against the US dollar. In terms of the nominal effective
exchange rate, the shekel has strengthened by 6 percent since the start of the
year, and by 1.2 percent since the previous interest rate decision. The
appreciation is delaying the inflation rate’s continued rise toward the
midpoint of the target range.
The equity indices in Israel continued to increase after the previous
interest rate decision, but have fallen since the end of April, with an
emphasis on the shares of pharmaceutical companies and in view of declines in
most of the global markets. The gap between the yields on US and Israeli government
bonds narrowed slightly. Yield spreads between corporate bonds and comparable duration
government bonds in Israel increased slightly, similar to the global trend (Figure
8).
For the past several quarters, the economy has been growing at near
its potential rate.  According to the
first estimate of National Accounts data for the first quarter of 2019, the
economy grew by 5.2 percent (Figures 11 and 12), but the figure was
affected markedly by increased new vehicle sales in the first quarter. After
adjusting for this effect, the Bank of Israel Research Department's assessment
is that economic growth was slightly below 3 percent. Services exports were particularly
strong, and goods exports also increased. Most recent data regarding exports
are more mixed. There is an apparent decline in the share of companies in the
Business Tendency Survey reporting a severe constraint in export orders, but
foreign trade data indicate a slowdown in goods exports in April. Private
current consumption increased at a relatively moderate rate in the first
quarter, and, other than vehicles, most components of investment contracted. Data
on the labor market data indicate that it remains tight—the employment rate and
the participation rate both increased slightly from the record rates at which
they had been (Figure14), the slight increase in the
unemployment rate since the beginning of the year does not indicate an increase
in the duration of unemployment –Figure 15), and wage increases are continuing, led by the business
sector (Figure 16). However, while the job vacancy rate remains high, it
has been declining moderately for several months.
In recent months, home prices reverted to registering moderate increases,
and have increased by approximately 0.5 percent in the past year (Figure9).
The number of transactions increased markedly, particularly among first-time
homebuyers, alongside the continued decline in investment in residential
construction. The trend of expansion in mortgage volume continues, and mortgage
interest rates declined slightly (Figure 10).
The risks to the global economy increased, despite first quarter growth
data of major economies surprising to the upside (Figure 17), mainly in
view of the worsening of the "trade war" between the US and China.
The IMF again revised its world trade forecast downward and revised its growth
forecasts downward for most regions, particularly for Europe (Figure 18).
The slowdown in world trade continues, and includes the emerging economies (Figure
19). In the financial markets, there were declines in equity indices,
mainly following the crisis surrounding the trade talks (Figure 23), and
government bond yields continued to decline moderately in view of the
expectation that the process of global monetary tightening will be halted for
now and a worsening of sentiment in the markets. In the US, there was some
continued moderation in core inflation. The Fed left the federal funds rate unchanged,
and noted that despite the strong growth in the first quarter, there is noticeable
moderation in private consumption and in investment. In Europe, the economic picture
continues to indicate weakness, although first quarter growth data in a number
of leading economies surprised to the upside. The ECB left its interest rate
unchanged, and its president noted that there are greater   expectations for a slowdown in growth in 2019.
In the UK as well, first quarter growth data were encouraging, but the risks
regarding Brexit remain high, and its implementation was delayed again. In
Japan, the moderation of economic activity since the beginning of the year
continued, and its parliament approved an incentive program to support the
economy. Growth in China stabilized in the first quarter after moderating at
the end of 2018, although data on economic activity indicate continued
moderation. Oil prices remained stable since the previous interest rate
decision, in view of the decline in supply being offset by worsening sentiment
in the markets. (Figure 21).
The minutes of the monetary discussions
prior to this interest rate decision will be published on June 3, 2019. The
next decision regarding the interest rate will be published at 16:00 on Monday,
July 8, 2019, following which the Governor will hold a press briefing.