Bank of Israel - Press Releases - The Monetary Committee decides on February 26, 2018 to keep the interest rate unchanged at 0.1 percent
Central bank: boi | Type: statement | Date: 2018-02-26

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
here.
The inflation
environment remains low. The CPI for January declined by 0.5 percent, and low
inflation is expected in the coming two months as well, in accordance with the
seasonal path and due to price reductions initiated by the government(Figure
2 in the attached data file). However, in the past month inflation
expectations increased: expectations for the coming year derived from the
capital market rose to 0.8 percent, and the average of professional forecasters’
projections is similar (Figure 4). There was also an increase in capital
market expectations for the medium terms (Figure 5): Second-year forward
expectations are around the lower bound of the target range, and third-year
forward expectations are within the range. Expectations for longer terms
continue to be anchored within the target range. The increase in expected
inflation occurred against the background of the depreciation of the shekel in
the last month (Figure 6). To the extent that the depreciation will
persist, it is expected, together with the impact of wage increases, to support
the continued increase in inflation.
Since the
previous interest rate decision, government bond yields increased in Israel and
abroad. The increase in Israel was more moderate than that in the US, so that
the yield gap increased (Figure 7). Spreads between corporate bond
yields and government bond yields increased slightly but remain very low,
similar to the trend worldwide.
Economic
activity continues to expand at a pace in line with its potential growth rate (Figure
10). Based on the first estimate of fourth quarter National Accounts data, the
economy grew in the fourth quarter of 2017 by 3.6 percent (seasonally adjusted,
in annual terms). Exports in the fourth quarter grew at a relatively high rate,
and with export data from previous quarters being revised upward, it appears
that for 2017 overall, growth was more balanced than previously assessed (Figure
11). Exports (excluding diamonds and startup companies) grew by 5.3 percent
in 2017. Services exports increased at a rapid rate, but goods exports
(excluding diamonds) also increased (by 2.5 percent,Figure 12), against
the background of the solid growth in world trade (Figure 18) and
despite the appreciation of the shekel. Investment grew moderately, relative to
2017, and there was a sharp decline in investment in residential construction.
Indicators of activity in January point to the economy growing at a similar
pace in the first quarter of 2018 as well (Figure 13). The labor market
remains tight, with continued improvement in various figures—the participation
and employment rates increased (Figure 14), the unemployment rate
declined, wages increased (though its rate of growth has moderated in recent
months,Figure 15), and the ratio of job vacancies to the number of unemployed
people is high.
Housing market
data continue to point to a slowing of activity. The last three monthly
readings of home prices showed declines, so that the annual rate of increase
moderated considerably (Figure 8). The number of transactions continues
to decline due to the prolonged decrease in transactions by people upgrading
their homes. New mortgage volume continues to increase slightly, following its extended
decline, with a continued slight decrease in interest rates (Figure 9).
Global economic
data indicate that the improvement is solidifying, and the IMF again revised upward
its growth forecasts for major economies and for world trade (Figure 17).
The equity market declines stopped a continued string of increases in most
markets, and have halted as of now (Figure 19). Most economies continue to
adopt accommodative monetary policy, but financial markets are pricing in a somewhat
less accommodative future policy path. The US economy is around full employment
and is expected to continue to grow at a solid pace in the coming years,
against the background of fiscal policy that is expected to be very
expansionary, while leading to an increase in the deficit and debt. The Federal
Reserve is expected to increase the federal funds target rate at its upcoming
meeting, and twice more during 2018. In 2017, the eurozone economy grew by 2.5
percent—the highest rate in the eurozone in the past decade, and the
improvement encompasses most of its member countries. The ECB kept the
accommodative monetary policy in place and signaled that it is expected to
continue. Growth in Japan continues, but inflation is still low and the
accommodative policy is expected to remain in place. Improvement in economic
activity was also seen in China and other emerging economies. Crude oil prices were
volatile after a prolonged increase (Figure 21).
The minutes of the monetary discussions prior to this interest
rate decision will be published on March 12, 2018.
The next decision regarding the interest rate will be
published at 16:00 on Monday, April 16, 2018, and will be followed by a press
briefing by the Governor.