Bank of Israel - Press Releases -  The Monetary Committee decides on November 25, 2019 to keep the interest rate unchanged at 0.25 percent
Central bank: boi | Type: statement | Date: 2019-11-25

The Monetary Committee's assessment is
that in view of the inflation environment in Israel, the monetary policies of
major central banks, the slowing in the global economy, and the continued
appreciation of the shekel, it will be necessary to leave the interest rate at
its current level for a prolonged period or to reduce it in order to support a
process at the end of which inflation will stabilize around the midpoint of the
target range, and so that the economy will continue to grow strongly. Furthermore,
the Committee is taking additional steps as necessary to make monetary policy
more accommodative. 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, clickhere.​
The inflation environment remains low. 
The CPI reading for September declined by 0.2 percent, and the reading
for October increased by 0.4 percent as expected, so that annual inflation
remained below the target range.  In the
past 12 months, inflation was 0.4 percent(Figure 1 in the attached file of
figures). In recent months, there has also been a decline in inflation excluding
energy and fruit and vegetables, to 0.5 percent, after having been stable
between 0.9 percent and 1.1 percent since the beginning of the year(Figure
2). This decline is mainly due to a slowdown in the rate of increase of the
housing and food components in the CPI. Inflation of nontradable goods prices
continued to moderate, and inflation in the prices of tradable goods remained
negative. Despite the decline in actual inflation, one-year expectations remained
stabled around the lower bound of the target range(Figure 4). There was
a slight decline in forward expectations for medium and long terms derived from
the capital market, and in the past few months, there has been a moderate but
continued decline in long-term expectations(Figure 5). Following the
previous interest rate decision, the shekel weakened slightly and then strengthened
again, so that in terms of the nominal effective exchange rate, it remained
stable. Since the beginning of the year, the shekel has strengthened by 8.9
percent(Figure 6). The appreciation continues to make it difficult to return
inflation to the target range.
Economic activity continues to grow at near its potential rate,
despite the negative global sentiment. However, the continuing uncertainty
regarding the political situation in Israel may leave its mark on economic
activity.  In addition, fiscal policy has
so far been expansionary, and if the government is forced to operate on a
continuance budget for a prolonged period, it may have a contractionary effect.
According to the first estimate of National Accounts data for the third quarter,
GDP grew by 4.1 percent(Figure 11). 
The volatility in vehicle imports continues to be reflected in the data,
and the Research Department's assessment is that the growth rate net of this
effect was slightly below 3 percent. The gap between the high GDP growth and
uses (private and public consumption grew moderately, investment and exports
contracted) was reflected in growth of inventory(Figure 12), but it is
reasonable to assume that when the data for the quarter are revised, this gap
will narrow.  Over time, services exports
have grown strongly, while goods exports have continued to stagnate.  The former has benefited from the continuing
boom in the global shares of technology companies(Figure 15), while the
latter is more sensitive to world trade and to the appreciation of the shekel.  The labor market remains tight. The most
recent data show a decline in the unemployment rate, alongside declines in the participation and employment
rates. Wage increases are continuing, led by the business sector, but at a
slightly slower pace than prevailed at the beginning of the year. The job
vacancy rate has been declining moderately for several months, but remains high,
and at this stage, it is unclear whether it indicates a slowdown in activity.
Equity indices in Israel continued to increase, alongside increases in
global markets. Long-term government bond yields remained stable since the
previous interest rate decision, despite the increase in yields in Europe and
the US (Figure 7). Yield spreads between corporate bonds of the
nonfinancial business sector and comparable government bonds continued the
downward trend that started at the beginning of the year.
Home prices continued to increase moderately, and in the past year they
have increased by 1.9 percent, while the annual rate of increase in rents is
moderating. The number of purchases grew, but purchases by investors
appear to be moderating. Mortgage volume continued to expand, and mortgage
interest rates continued to decline.
The global economy continued to slow(Figure 20).  With the exception of the United States, most
third quarter growth data surprised to the downside, and the main weakness is
focused on manufacturing. The balance of risks continues to tend downward, and
the deterioration in world trade continues(Figure 21), but the risk of
significant worsening in view of the "trade war" and Brexit has
declined. Inflation remains lower than the central banks' guiding targets(Figure
23), but it appears that the process of deepening monetary accommodation by
the major central banks has reached its limit at this stage. In the financial
markets, the price increases in equity indices have continued(Figure 26).
In the US, the Federal Reserve lowered the federal funds rate by 0.25
percentage points, but signaled that the rate will remain at its current level
unless there is a significant change in the state of the economy. Growth surprised
to the upside in the third quarter, but it is expected to slow in the fourth
quarter. In Europe, growth remains moderate, and industrial production
continues to contract, particularly in Germany. The ECB left its interest rate
unchanged, and according to market assessments, it is not expected to change in
the coming two years. In Japan, growth slowed and is expected to continue
slowing in the fourth quarter, in view of the increase in VAT. Growth in China continued
to moderate. Oil prices increased since the previous interest rate decision, in
view of an expected increase in demand and a reduction of supply(Figure 24).
The minutes of the monetary discussions
prior to this interest rate decision will be published on December 9, 2019. The
next decision regarding the interest rate will be published at 16:00 on Thursday,
January9, 2020, followed by a press briefing by the Governor.