Bank of Israel - Press Releases - The Monetary Committee decides on January 3, 2022 to keep the interest rate unchanged at 0.1 percent
Central bank: boi | Type: statement | Date: 2022-01-03

The Israeli economy’s process of recovery from
the crisis continues. However, there are still challenges to economic activity.
The Committee will therefore continue to conduct an accommodative monetary
policy for a prolonged time, in accordance with the pace of growth, employment,
and the path of inflation. This is in order to continue supporting the
attainment of the policy targets and the economic recovery from the crisis, and
to ensure the continued orderly functioning of the financial markets.
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The ongoing economic activity in Israel continues
to expand 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.
However, the increase in the morbidity rate and in the infection coefficient
due to the “Omicron” variant increase the risk to activity and may have
macroeconomic significance in accordance with their scope.  These developments are leading to an increase
in uncertainty regarding the intensity of economic activity in the short and medium
term.
Since the previous interest rate decision, inflation
in Israel has been stable around the midpoint of the target range (Figure 1).
The CPI for November declined by 0.1 percent. Inflation in the past 12 months was
2.4 percent (2.1 percent net of energy and fruit and vegetables;Figure 2).
The year over year rates of increase in the prices of nontradable components and
in the prices of tradable components stabilized (Figure 3). One-year
inflation expectations from all sources declined slightly, and are within the
target range. However, there remains a gap between expectations derived from
the capital market, and the lower expectations derived from the banks’ internal
interest rates and of the professional forecasters, although the gap narrowed
during the reviewed period (Figure 4). Medium- and long-term
expectations are all within 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 interest rate decision, there was some volatility in the exchange
rate.  At the end of the period, the
shekel had weakened by 0.7 percent against the US dollar, by 1 percent against
the euro, and by 0.2 percent in terms of the nominal effective exchange rate (Figure
6).
Economic activity continues apace. The
aggregate balance of the Central Bureau of Statistics Business Tendency Survey
continued to increase in November (Figure15), and is
similar to its precrisis level in 2019. 
In view of the continued global supply chain difficulties, there was an
increase in the intensity of the equipment and raw materials constraints that
companies reported (Figure 26). 
Credit card purchases stabilized at a high level since the end of
October.  However, with the increase in
the spread of the Omicron variant in December, there was a decline in credit card
purchases, especially in the domestic tourism industries (Figure 17).  Goods exports (excluding ships, aircraft, and
diamonds) remained unchanged, and remain higher than their precrisis levels. Services
exports continued their upward trend, and are at a very high level (Figure 18).
Goods imports continue to increase, and all components are at high levels (Figure
20).
Labor market data for November show a marked
improvement in the employment indices. The broad unemployment rate declined to
about 6.5 percent in November (Figure 21). The adjusted employment rate increased
to 60.2 percent—the highest level since the start of the COVID-19 pandemic—reflecting
a gap of about 60,000 employed persons (0.9 percentage points) compared with
the average employment rate in 2019.Labor
market data for the first half of December show a similar picture. The number
of job vacancies remained high in November, and is higher than in the months
prior to the crisis (Figure 23). The high level of job vacancies
alongside the decline in unemployment reflect a tightening of the labor market.
It should be noted that, at least until September, wage levels (after
neutralizing the effects of the composition of employees that typified the
COVID-19 crisis period) in most industries were similar to the precrisis trend,
but there has been some recent acceleration in wage increases in some
industries.
The Bank of Israel Research Department revised
its staff forecast.  In its assessment,
GDP will grow by 5.5 percent in 2022 and by 5 percent in 2023 (Figure 14).  The adjusted employment rate is expected to
continue increasing slightly, to 60.7 percent at the end of 2023.  Accordingly, the broad unemployment rate is
expected to continue declining, to about 4.4 percent at the end of 2023.  The inflation rate is expected to be 1.6
percent in 2022, and 2 percent in 2023. 
In addition, the debt to GDP ratio in 2022 and 2023 is expected to be 69
percent.
Home prices increased by 10.3 percent in the
past 12 months (Figure 10), a significantly higher pace than in previous
years. The volume of mortgages taken out remained high in November, in line
with the trend since the beginning of 2021 (Figure 11). Alongside these,
the annual rate of increase in rental prices remained relatively moderate,
although there was some increase in the most recent data.
In the domestic capital market, equity prices
continue to increase, and government bond yields declined slightly in most
ranges.  Corporate bond spreads increased
slightly, but remained low. (Figure 9). The credit market continues to
function well, with stable and low interest rates. The Central Bureau of
Statistics Business Tendency Survey shows that financing difficulties among
businesses of various sizes have returned to levels similar to those prior to
the crisis (Figure 13).
The global economy continued its trend of
recovery during the reviewed period, but there was an increase in uncertainty
toward the end of the period, in view of the spread of the “Omicron”
variant.  The increase in morbidity may
lead to a slowdown in the pace of economic activity in the short term, and may
continue to cause difficulties in the production and supply chains.  The revised growth forecasts of the various
investment houses remained virtually unchanged. The global Purchasing Managers Index
increased slightly and continues to indicate a relatively high level of
economic expansion, particularly in the services sector (Figure 30). The
volume of world trade also increased slightly, and remains at relatively high
levels (Figure 29). The positive sentiment in the equity markets in most
advanced economies continues.  The
government bond markets were typified by a mixed trend. Yields in Europe
increased, while there was a slight flattening in the US yield curve. Oil and
other commodity prices remained virtually unchanged.  Natural gas prices in Europe were very
volatile in view of the energy crisis in Europe. The global inflation
environment continues to increase. In most countries, the inflation indices increased
to levels higher than their central bank targets, and in some, core inflation
is also higher than the targets.  Some central
banks and forecasters therefore adjusted their assessments regarding the
temporary nature of the inflation, and monetary tightening around the world
continued. In the US, the Federal Reserve left the federal funds rate
unchanged, but again 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.  In
addition, the Fed revised the forecast pace of interest rate increases upward,
in view of the further increase in inflation, to a year-over-year level of 6.8
percent, and the continued recovery of the labor market. In Europe, the sharp
increase in annual inflation continues, with the rate now at 4.9 percent. The
ECB left its interest rate unchanged, and announced a reduction of its purchases
in the markets.  In the UK, inflation
increased sharply, to 5.1 percent, and the Bank of England increased its interest
rate by 15 basis points to 0.25 percent. There were interest rate increases in
a number of additional countries where inflation was significantly higher than the
central bank targets (Figure 34).
The
minutes of the monetary discussions prior to this interest rate decision will
be published on January 17, 2022. The next decision regarding the interest rate
will be published at 16:00 on Monday, February 21, 2022.