Yesterday and today, the Monetary Committee held discussions at the Bank of Israel in order to decide on monetary policy.
The end of the year, and the beginning of a new one, is a good point in time to stop and look back—and to look forward as well. Living with the cyclical nature of the spread of the coronavirus is our reality currently, and will apparently continue to be so for the foreseeable future as well. When I look at my remarks from recent press briefings, I see how in July we spoke about exiting the third wave, and in October we referred to a fourth wave. Now, as we end 2021, and head into 2022, we are dealing with a fifth wave. We are constantly aware of this reality, of the cyclicality, and of the persistent risks, and they are taken into account when analyzing the economic situation and in reaching monetary policy decisions.
We cannot know with certainty how the fifth wave—“the Omicron wave”— will turn out, in terms of health and the economy. It appears that it will be different in its scope of infection and in the extent of its impact on the rate of severe illness. These also impact on the methods that the government chooses to adopt to deal with new wave. However, it can be said that the Israeli economy has learned to function alongside the virus, to adjust to it, and to successfully conduct economic activity even when facing the threat of infection and the risks. Therefore, we have to do the best we can to enable the economy to continue to work and prosper while protecting health and maintaining control of the scope of morbidity.
Let me turn now to an overview of the main economic developments. Our assessment is that in 2021, GDP grew by 6.5 percent. This is according to the Research Department’s staff forecast published today. This is impressive growth that indicates the strength of the recovery, and shows that the level of GDP is approaching the trend that would have been expected if not for the pandemic. When looking at activity itself, we see that the aggregate balance of the Business Tendency Survey conducted by the Central Bureau of Statistics already returned in the beginning of 2021 to expansion, and has remained in that area since then. Credit card purchases, which were used as a leading indicator of economic activity at the height of the crisis, returned to their long term trends, and even exceeded them. Of course, credit card activity fluctuates in line with the cyclicality of morbidity, and the difficulty is currently seen in certain vulnerable industries, particularly since the outbreak of the Omicron variant.
Global supply chain difficulties and supply side limitations are additional challenges that we experienced in the past year. These led to companies reporting increasing difficulty over the course of the year in purchasing raw materials and equipment. With that, the assessments are that these will moderate over the course of the coming year, after the Omicron wave winds down, and they are expected in time to make things easier for business activity in Israel and worldwide. With regard to foreign trade, which is so important to a small and open economy like Israel’s, it can be seen that services exports continue to expand as part of the structural change occurring in the economy. This change was even accelerated due to characteristic Israeli innovation, and driven by the technology industries in which the demand for their products increased during the COVID-19 period. Imports to Israel also increased, in all components, despite the difficulties in the supply chains.
In the labor market, we continued to face challenges in the past year, but looking at the current situation, it can be said that there has been a notable recovery and we are nearing the pre-crisis levels in some indicators. Contributing to this was the ebbing of the fourth wave of morbidity, and with that the continued process of the economy’s return to routine activity, and the end of most of the safety-net terms in the labor market. However, it should be remembered that this is a complex process and we have to continue to examine and accompany the labor market’s recovery process—certainly now with the increasing morbidity, and with it, the potential for adverse impact on activity. In the background there has been a continued increase in the number of job vacancies alongside a decline in the unemployment rate, which could indicate some tightening of the labor market. Wage levels in the economy did not deviate from the pre-crisis trend and in some industries there has been some acceleration in wage increases recently. It will be important to follow these developments in the coming months.
I would like to move now to the financial sector. This is the system that facilitates real economic activity, and therein is its great importance. We have seen for some time the Israeli credit market functioning well with stable and low interest rates. An examination of financing constraints among businesses of different sizes continues to indicate low levels of difficulty, which are similar to those prior to the crisis. I believe that in the coming year we will be able to continue contributing to increasing the sophistication and the development of the credit market, with the promotion of open banking, one-click switching between banks, the reform in the area of mortgages, and more.
In light of all I’ve mentioned and based on additional data, the Research Department today published an updated macroeconomic forecast. According to the forecast, GDP is expected to grow by 5.5 percent in 2022. In addition, the Department also published for the first time a forecast for 2023, with GDP growth that year expected to be 5 percent. The broad unemployment rate is expected to continue to decline, reaching 4.4 percent at the end of 2023. The inflation rate is expected to slow, reaching 1.6 percent in 2022 and to stabilize at the middle of the target range, at 2 percent at the end of 2023. With regard to the risks to the forecast, the risk from the development of the current wave and additional waves of morbidity that will have a significant impact on activity still exists, but it has declined in view of the adjustments made by the economy since the outbreak of the pandemic. Additional risks that exist are the uncertainty regarding inflation abroad in the coming period and foreign exchange market developments that can impact on inflation in Israel.
With regard to inflation, it is lower in Israel than in most OECD countries. Essentially, the inflation rate in Israel is in the bottom decile of OECD countries. This situation enables us to be patient in conducting monetary policy with continued examination and analysis of the various developments. In addition, 1-year inflation expectations and forecasts, and those for the coming years, are all within the target range and do not reflect expectations of an acceleration. I want to be clear—we are in a different place than countries with inflationary pressures, and this is an important advantage for Israel’s economy at this time.
It should also be noted that this situation, where inflation in Israel is low relative to the world, has characterized recent years and is not a phenomenon unique to the COVID-19 period. In recent years, several factors can be noted that impacted on that, such as structural changes in the economy, some of them at the government’s initiative, alongside the expansion of Internet purchases, which affect an increase in competition and downward pressure on prices—it is reasonable to assume that these factors will continue to exist in the near future as well. In addition, inflation in Israel, as a small and open economy, is impacted both by the exchange rate and by worldwide developments in prices of commodities and energy. In the wage area as well, the agreement reached by the government recently is expected to contribute to moderation of pressures for wage increases.
There was a moderate increase in rental prices in most months in the past year, but in the recent period they have increased at a faster pace. It will be necessary to continue to follow to what extent this increase persists against the background of the increase in home prices. Recall that the latter are not included in the CPI and increased by a very high rate in the past year. In this area, the government has to provide solutions for continued growth in building starts and to provide certainty to the housing market that the scopes of building will be high for a considerable period of time.
With regard to the foreign exchange market, I reiterate that the $30 billion program that we announced in 2021 was a special plan for special times. As I have said on more than one occasion, we are not limited afterward in our intervention. The Bank will continue to act in the foreign exchange market at its discretion and taking economic activity into account.
From a global perspective it appears that the worldwide economy continues to recover and the scope of world trade is increasing and is at high levels of expansion. However, the spread of the Omicron variant worldwide is increasing the uncertainty and the concern over significant limitations on economic activity. The realization of this concern is liable to lead to a slowing of the global recovery process and would primarily weigh on the releasing of production and global supply limitations. Despite the increase in the uncertainty, most equity indices increased in the reviewed period.
Regarding monetary policy worldwide, it can be seen that the monetary contraction continues gradually in view of the development of inflation. In the US, the Federal Reserve kept the federal funds rate unchanged but reduced the amounts to be purchased in the government bond and MBS programs so that they are expected to end in March. In addition, it revised upward the forecast for the pace of expected interest rate increases. In Europe, the ECB kept the interest rate unchanged and announced a reduction of purchases in the markets. In the UK, the Bank of England decided to increase the interest rate, as did several other countries in which the inflation rate was well above its target.
As I explained in the beginning of my remarks, the situation in Israel is different, which allows us patience in examining the developments and in conducting monetary policy. Therefore, at the end of the discussions the Monetary Committee decided to keep the interest rate unchanged. We are constantly examining market conditions and the development of prices, and the accommodative monetary policy will continue to accompany the exit of the Israeli economy from the economic crisis.
Stay safe, and good health to all.
Thank you.