Bank of Israel - Press Releases - Monetary Policy Report, July–December 2017
Central bank: boi | Type: statement | Date: 2018-02-15

vMonetary policy:In the
second half of 2017, the Monetary Committee left unchanged the interest rate
set in March 2015—0.1 percent—because the inflation environment ranged below
its target rate. In its forward guidance, the Committee declared that the
monetary policy would remain accommodative for as long as needed to entrench
the inflation environment within the target range. Against the backdrop of the
depreciation that occurred in the beginning of the period under review, the
Bank of Israel reduced its intervention in the foreign exchange market. After
some appreciation during the course of the period, the shekel appreciated
further toward the end of the period under review and afterwards, and in
January 2018 the Bank of Israel expanded its intervention.
vActual inflation and inflation expectations:Over
the course of the year, the annual rate of inflation remained below the
inflation target, and reached 0.4 percent at the end of the year. For the first
time since 2014, inflation was positive for most months of the year, although
its development over the year was uneven. Inflation ranged below the target as
a result of the continuous appreciation of the shekel prior to the period under
review as well, government action to reduce the cost of living, increased competition
in the economy, low global inflation, and despite rising wages and the strength
of the labor market. Inflation expectations for a period of up to two years
remained below the lower bound of the inflation target range, and forward
inflation expectations for the third year (years 2–3) ranged around the lower
bound and rose slightly at the year end. Longer term inflation expectations
remained firmly anchored within the target range.
vReal domestic activity:The
data available to the Monetary Committee in the second half of 2017 indicated
that growth increased at a more moderate pace this year, leading to the
assessment that the rate is consistent with the economy’s potential growth.
Committee members believed that the moderation in the growth rate primarily
reflects limitations on the supply side resulting from the full employment
environment. After the weakness in exports seen in recent years, and
particularly in goods exports, they recovered at the beginning of the second
half of the year, led by services exports. However, the recovery halted later
on, and private consumption returned to being the main component of growth.
vThe exchange rate:After a
marked appreciation in the nominal effective exchange rate of the shekel in the
previous half-year period, there was a moderate depreciation of 1 percent in
the second half of the year (December average vs. June average). The
development of the exchange rate was, however, uneven in this period: a
considerable depreciation occurred until August, primarily against the euro,
which was then followed by an appreciation of the shekel. In the beginning of
2018, through February 9th, the shekel depreciated by approximately
2.5 percent compared to its average level in December 2017.
vThe housing market:In the
second half of 2017 (until November), the rate of increase in home prices
slowed. Alongside a decline in the number of transactions, there was also a
decrease in building starts, though the supply is expected to increase in the
future, as the number of building permits increased. Monthly mortgage volume
stabilized after a sharp decline, and as a result, the balance of housing
credit expanded at a more moderate rate compared with the previous year.
vThe global economy:In the
period under review, world trade as well as growth figures for most economies
continued to improve, and growth forecasts were revised upward. The US Federal
Reserve is raising the federal funds rate gradually, with an increase in
December as well. The ECB kept the interest rate at -0.4 percent and announced
that it would reduce the scope of its monthly bond purchases beginning in
January 2018 but would extend the period during which it makes the purchases.
Other central banks shifted their monetary policies to a less accommodative
stance, although the monetary environment remains extremely accommodative.,
inflation remained below target in most major economies, although in the period
under review the growth rate of global commodity and oil prices accelerated .
vThe financial markets:Between
July and November (inclusive), domestic share indices were stable, mainly
underperforming compared to leading global indices. This is primarily due to
the underperformance of the major chemical and pharmaceutical companies, which
are heavily represented in Israeli indices. In December, the domestic situation
reversed, and for the second half of 2017 overall, domestic share indices rose
only slightly less than US and European indices. In the beginning of February
2018, after the period reviewed in this report, there were sharp declines in
equity indices in Israel and abroad. In the second half of 2017, nominal yield
curves shifted downward for medium and long-term maturities. In 2017, the flood
in issues of nonfinancial public companies continued and in the period under
review spreads between corporate and government bonds declined to their lowest
level since 2007. In the second half of 2017, tax revenues exceeded forecasts
and ultimately allowed the government to repay a portion of its debt early, and
to reduce the scope of its debt raising.
vResearch Department staff forecast:According to the staff forecast published by the Research Department in January
2018, GDP is expected to grow by 3.4 percent in 2018 and by 3.5 percent in
2019. Inflation is expected to converge to within the target range during 2018
and reach 1.1 percent at the end of the year. The Bank of Israel interest rate
is expected to remain at its current level until the third quarter of 2018, and
rise in the fourth quarter.