Bank of Israel - Press Releases - The Monetary Committee decides on July 9, 2018 to keep the interest rate unchanged at 0.1 percent
Central bank: boi | Type: statement | Date: 2018-07-09

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 continues to rise gradually, supported by
the accommodative monetary policy, and is drawing close to the price stability
target range. In the 12 months ending in May, the inflation rate was 0.5
percent (Figure 1 in the attached data file), and inflation indices that
exclude transitory effects are higher, though still below the target (Figure
2). Annual inflation is expected to increase once the June 2017 inflation
figure, which was particularly low, exits the 12-month calculation. Inflation in
the prices of tradable goods remains negative, but is on an upward trend,
impacted by the rise in energy prices and depreciation of the shekel against
the dollar. Inflation in the prices of nontradable items resumed its increase
in the past two months, led by the housing component (Figure 3). Since
the previous interest rate decision, there has been an increase in one-year inflation
expectations from various sources (Figure 4). Forward expectations for
inflation beginning from the second year also increased, and longer-term
expectations remain anchored within the target range (Figure 5). According
to the Research Department’s staff forecast, inflation in the next four
quarters is expected to be 1.4 percent. The effective exchange rate remains
relatively stable. Since the previous interest rate decision there has been a depreciation
of about 1 percent, following an appreciation in the weeks preceding it (Figure
6).
Since the previous interest rate decision, yields on government bonds
in Israel have increased, in contrast with declines in the other advanced
economies, and therefore the spread between the nominal yield on 10-year US Treasury
securities and the yield on similar Israel government bonds narrowed(Figure
7). The real-yield spreads between corporate and government bonds continued
to widen, but are still at a low level(Figure 8).
The second estimate of National Accounts data also shows that in the
first quarter of 2018, economic activity continued to expand at a solid pace (Figure
11) and even slightly above potential, reflecting in part the large
increase in vehicle imports in the first quarter that had a prominent effect. In
contrast, the growth rates of exports and of investments were revised downward.
Indicators of economic activity show some slowing of the growth rate. According
to the initial data from the Companies Survey, the growth rate in the second
quarter was in line with the potential rate(Figure 12); the Composite
State of the Economy Index for May increased by 0.25 percent—slightly lower
than the rate of increase in previous months; and the Purchasing Managers Index
published by Bank Hapoalim declined in May and is slightly below the boundary
that distinguishes between expansion and contraction. Goods exports have
moderated in recent months(Figure 14). The labor market remains tight,
with the unemployment rate still very low and the participation and employment
rates remaining high (Figure 15). Wages continue to increase at a high
rate (Figure 16), while there is strong demand for workers and companies
are reporting constraints in hiring new workers. The increase in wages is
reflected in the continued increase of unit labor cost. According to the
Research Department’s staff forecast, GDP is expected to grow at a rate of 3.7
percent in 2018 and 3.5 percent in 2019.
Home prices stabilized in the most recent two months for which data
have been published (February and March), after having declined by 2.4 percent
from the peak reached in August (Figure 9). In contrast, the annual rate
of increase in rental prices (in new and renewing contracts) continued to rise
in May, to 2.9 percent. There is a significant slowing of the number of
building starts and of investment in residential construction. New mortgage
volume continued to increase, and mortgage interest rates remained stable after
declining in 2017 (Figure 10).
Global economic data remain positive, although it seems that the
growth is losing strength. International investment houses revised their growth
forecasts for the major economies slightly downward (Figure 18), the
growth rate of world trade slowed in recent months (Figure 19), and the
decline in the global purchasing managers index signals a weakening of momentum.
In recent weeks the risk of an intensifying trade war has again increased, and political
tensions in Europe have increased. Equity market prices in advanced economies remained
stable, in contrast with declines in the emerging markets (Figure 23). Inflation
in the US continues to converge with the Fed’s target, while in the other
advanced economies it remains moderate but is increasing gradually (Figure
20). The US economy is close to full employment with a gradual increase in
wages. At this point, second quarter growth seems high. The Federal Reserve is
continuing with its path of raising the interest rate. It increased the federal
funds rate this month, and is expected to increase it twice more in 2018. In
Europe, following moderate growth in the first quarter, macroeconomic data for
the second quarter also indicate moderate growth. The ECB announced a plan to
halt bond purchases at the end of 2018, though the text of its announcement has
led to expectations that an interest rate increase would not take place before
the fall of 2019. Monetary policy in Japan remains very accommodative. Financial
risk in the emerging economies increased, as reflected by negative sentiment in
the capital markets, capital outflows, and the weakening of currencies due to the
increased yields in the US. Crude oil prices continued to increase, and there
was a decline in commodity prices (Figure 21).
The minutes of the monetary discussions prior to this
interest rate decision will be published on July 23, 2018.
The next decision regarding the interest rate will be
published at 16:00 on Wednesday, August 29, 2018.