Bank of Israel - Press Releases - The Monetary Policy Report for the first half of 2019
Central bank: boi | Type: statement | Date: 2019-07-25

Monetary
policy:This report reviews the monetary policy in the first half of 2019
and in the beginning of the second half of 2019.[1]In
the first half of 2019, the Monetary Committee kept the interest rate
unchanged, after increasing it to 0.25 percent at the end of the previous half
year. The Committee’s decisions kept the forward guidance, which stated that
the Committee assesses that the rising path of the interest rate in the future
will be gradual and cautious, in a manner that supports a process at the end of
which inflation will stabilize around the midpoint of the target range, and
that supports economic activity. In the period reviewed, the Bank of Israel
bought a small amount of foreign exchange—$86 million.
The
inflation environment:The 1-year
inflation rate was slightly above the lower bound of the target range during
the entire reviewed period (the CPI for January through May), similar to its
level in most months in the previous half year, and one-year inflation
expectations, based on most sources, were as well. Inflation expectations for
medium and long terms remained well entrenched within the target range
throughout the half year. With regard to the inflation environment, the
Monetary Committee members noted that for a notable period of time there had
not been a significant change in it. Inflation in nontradable goods prices (an
approximation of the domestic component of inflation) was above 2 percent
throughout the half year, and the inflation rate in tradables became slightly
negative in some of the months, as opposed to the previous half year, but
afterwards it returned to being positive. After the end of the period reviewed,
the CPI for June, which was lower than expected, was published, and the
12-month inflation rate in June was slightly below the lower bound of the
target range.
Real
domestic activity:The data on
real activity published during the reviewed period supported the assessment
that activity is converging to growth at a pace slightly lower than its
potential of approximately 3 percent, and that data on the previous half year
indicated a transitory slowing in the second and third quarters of 2018 that
derived from supply constraints. This assessment is supported mainly by the
tight labor market and the continued increase in wages, primarily in the
business sector.
Fiscal
policy:During the course of the half year
reviewed, the marked uncertainty in the fiscal sphere was discussed, among
other things in view of the general elections that were held during the period:
this derived from the possible ramifications of the coalition-forming
negotiations, from the steps that the future government might take in order to
deal with the expected deficit and from their possible effects on economic
activity and on the inflationary path. In any case, the fiscal uncertainty is
expected, in the Committee’s assessment, to continue for some time.
Capital
market developments:Telbor
market-based expectations with regard to an interest rate increase declined for
all ranges during the course of the half hear, and they reflect a relatively
high probability of no change in the interest rate in the coming year, in
contrast to forecasters’ assessments and the Research Department’s staff
forecast. In the half year reviewed, a downward trend in nominal and real
yields in Israel for all ranges was seen, similar to their declines worldwide.
The
housing market:Data published
toward the end of the period reviewed[2]indicated an increase in home prices of 1 percent in the past 12 months,
following a year over year decline of more than 2 percent in some months of the
previous half year. This is in parallel to the marked increase in the number of
transactions. Despite the increase in home prices, the Committee members agreed
that it is still too early to assess if the trend of rising prices is renewing
or if their decline will continue. There has been a continued moderate rising
trend in new mortgage volume since the end of 2017, against the background of a
slight decline in the weighted real interest rate on mortgages, which started in
the beginning of 2019.
The
global economy:The Committee
discussed the global economy—the moderation of activity, the uncertainty and
the risks, as well as the downward revision of growth forecasts and the
expected change in the interest rate path and in monetary policy worldwide. In
the US, a lower interest rate path than before, and even an interest rate
reduction, is expected, and in Europe, the expected date of the beginning of
raising the interest rate was deferred. The Committee members assessed that the
decline in world trade is expected to continue to impact on activity in Israel.
The Committee discussed additional risk factors that impact on the global
economy, including the possible US-China trade agreement and the uncertainty
regarding Brexit.
The
shekel exchange rate:During the
half-year reviewed, the shekel strengthened markedly against major currencies,
after it had depreciated in the fourth quarter of 2018. From the beginning of
the half year, the shekel strengthened in terms of the nominal effective
exchange rate, the dollar, and the euro; it appreciated by 5.4 percent in
nominal effective exchange rate terms. The Committee members noted that the
appreciation is the main factor delaying the continued increase of the
inflation rate toward the midpoint of the target.
Research
Department staff forecast:The Research
Department’s staff forecast did not change markedly during the period reviewed.
Based on the forecast compiled by the Research Department and published with
the interest rate decision on July 8, 2019, GDP is expected to grow by 3.1
percent in 2019 and by 3.5 percent in 2020, a downward revision of 0.3
percentage points for 2019 (compared with the forecast compiled in January
2019). Inflation is expected to be 1.6 percent in 2019 (an upward revision of
0.3 percentage points for 2019 vis-à-vis the forecast in January) and 1.6
percent in 2020 (a downward revision of 0.2 percentage points for 2020
vis-à-vis the forecast in January). According to the forecast, the Bank of
Israel interest rate is expected to increase to 0.5 percent toward the end of the
third quarter of 2019 and to continue to increase gradually to 1 percent by the
end of 2020 (a downward revision of 0.25 percentage points for 2020, compared
with the forecast compiled in January 2019). Since the publication of the
forecast, there were two developments in relatively significant parameters that
impact on it: the CPI for June surprised to the downside, and there was a
slight increase in the probability ascribed by the markets to monetary
accommodation soon in the US.
[1]Decisions in 2019 were reached on February 25, April 8, May 20, and
July 8.
[2]Home
Prices Survey data for March-April 2019.