Bank of Israel - Press Releases - The Monetary Committee decides on April 16, 2018 to keep the interest rate unchanged at 0.1 percent
Central bank: boi | Type: statement | Date: 2018-04-16

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
The inflation environment remains below the target, though some
increase in it is apparent. The Consumer Price Index increased in February and
March by a rate slightly higher than forecast(Figure 1 in the attached data
file),and over the past 12 months, inflation was 0.2 percent. Inflation
in nontradable goods prices continues to decline, while the inflation rate of
tradable goods prices is becoming less negative(Figure 3). Since the previous
interest rate decision, there has been a mixed trend in one-year inflation
expectations from various sources, though they all remain below the target(Figure
4). Medium-term expectations derived from the capital market are stable(Figure
5), with second-year forward expectations slightly above the lower bound of
the target range, and medium- and long-term expectations anchored within the
range. Since the previous interest rate decision, there has been no significant
change in the exchange rate. The shekel strengthened by 2 percent at the
beginning of the period, and weakened by a similar amount thereafter(Figure
6).
Since the previous interest rate decision, yields on government bonds
in Israel and abroad have declined, and the spread between the nominal yield on
10-year Israeli government bonds and the yield on similar bonds in the US
remained stable(Figure 7). The real yield spreads between corporate and
government bonds continued to increase moderately, but remain very low(Figure
8).
Economic activity continues to expand at a solid pace, which may even
be higher than the potential growth rate(Figure 12). According to the
second estimate of National Accounts data for the fourth quarter of 2017, the
economy grew in the fourth quarter by 4.1 percent (seasonally adjusted, in
annual terms). Indicators of activity in recent months permit the assessment
that the growth rate in the first quarter of 2018 was similar. This can be seen
in, for example, the Composite State of the Economy index, which increased by
0.4 percent in March(Figure 13), and the initial findings of the
Companies Survey(Figure 14). Services exports are leading the growth of
exports, but there has also been a slight improvement in goods exports. The
labor market remains tight. The unemployment rate remains very low, and the participation
rate and the employment rate remained at record highs(Figure 15); wages
continue to increase, although there was some moderation in the rate of increase
in recent months(Figure 16); and the ratio of job vacancies to
unemployed persons is high, although growth of the job vacancy rate is
moderating.
Housing market data continue to indicate a slowdown in activity. The
increase in home prices has halted, and there was a decline of 2.4 percent in
home prices in the last five months for which data have been published(Figure
9). The volume of transactions continues to decline, particularly transactions
made by those upgrading their homes. During the course of 2017, there were declines
in building starts and in building completions, though in the second half of
the year there was an increase in building permits(Figure 10). Mortgage
volume increased slightly after a prolonged decline, with a slight decrease in
mortgage interest rates(Figure 11).
Data on the global economy indicate that the improvement is being
entrenched. The OECD revised its growth forecast for the major economies upward,
mainly due to the fiscal expansion in the US and the continued growth in global
demand(Figure 17). However, various indices point to uncertainty, a
weakening of momentum, and increased risk. There are growing concerns of a
“trade war”, although the measures adopted thus far have a limited effect, and
the sides are apparently trying to reach understandings. Geopolitical tensions
have also increased. Tightening of financial conditions in the US pose further risk
to the global economy. There were declines in equity markets, accompanied by
high volatility(Figure 22). Most major central banks are continuing
with accommodative monetary policies, and during the reviewed period, there was
a slight increase in inflation, but it remains below the central bank targets(Figure
21).The US economy is close to full employment, and is expected to
continue its strong growth against the background of the expansionary fiscal
policy decided upon by the administration in recent months, which is expected
to also lead to an increase in the deficit and in the debt. The Federal Reserve
increased the federal funds rate as expected, by 25 basis points, in its most
recent decision, and is expected to increase the rate twice more during 2018. In
the eurozone, the relatively rapid growth rate continues. The ECB continued
with its accommodative monetary policy. The expansion of the Japanese economy
is continuing for the ninth consecutive quarter. Economic activity improved in
emerging economies as well, but China was particularly impacted by uncertainty
regarding the “trade war”. The price of oil resumed its increase against the
background of increased demand and geopolitical risks(Figure 23).
The minutes of the monetary discussions prior to this
interest rate decision will be published on April 30, 2018.
The next decision regarding the interest rate will be
published at 16:00 on Monday, May 28, 2018.