• Economic activity remains strong.  The labor market is robust and has returned to levels quite similar to those prior to the crisis.
  • Inflation in Israel increased in recent months, but is significantly lower than inflation in most of the world.  It is above the upper bound of the target range, at 3.5 percent over the past 12 months.  One-year inflation expectations increased, and are around the upper bound of the target range.  Longer-term expectations are anchored within the target range.
  • Since the previous monetary policy decision, the shekel has weakened by 0.5 percent against the US dollar, and has strengthened by 3.8 percent against the euro and by 1.8 percent in terms of the nominal effective exchange rate.
  • The Research Department updated its staff forecast.  In its assessment, GDP will grow by 5.5 percent in 2022 and by 4 percent in 2023.
  • The upward trend in home prices continued to accelerate, with prices rising by 13 percent in the past 12 months.
  • The war in Ukraine and the increase in morbidity in China are deepening the interruptions in the global production chains, increasing inflationary pressure, and leading to some slowdown in the pace of global economic activity.

 

 

The Israeli economy is recording strong growth, accompanied by a tight labor market and an increase in the inflation environment. The Committee has therefore decided that conditions allow for the start of a gradual process of increasing the interest rate.  The pace of raising the interest rate will be determined in accordance with activity data and the development of inflation, in order to continue supporting the attainment of the policy goals.

 For the file of figures accompanying this notice, click here.​​​​​

 Ongoing economic activity in Israel is continuing at a high level alongside the COVID-19 pandemic and the cyclical nature of the waves of morbidity.  The labor market is robust and has returned to levels similar to those prior to the crisis.  This has been possible, in part, thanks to the adaptation of most industries to functioning alongside the pandemic.   With that, there is some uncertainty regarding the expected intensity of economic activity in the short and medium term, in view of the risks of further morbidity cycles and the parallel development of new strains of the virus in the future, developments in Europe, and the political uncertainty and security incidents in Israel.

 Since the previous interest rate decision, the CPI increased by 0.7 percent in February.  Inflation in Israel increased in recent months, but is significantly lower than inflation in most of the world.  Inflation is above the upper bound of the target range, and was 3.5 percent in the past 12 months (Figure 1).  Net of energy and fruits and vegetables, inflation is 3 percent, and with the further neutralization of the effects of taxation and regulation, it is 2.7 percent (Figure 2).  The annual pace of inflation in both the nontradable and the tradable components continued to increase in recent months (Figure 3).  Inflation expectations for the coming year from the various sources increased, and are around the upper bound of the target range (Figure 4).  Expectations derived from the capital market for the second year are above the target range, and expectations for the third year converged back to around the upper bound of the target range.  Expectations for longer terms are anchored within the target range (Figure 5).  Since the previous monetary policy decision, the shekel has weakened by 0.5 percent against the US dollar, strengthened by about 3.8 percent against the euro, and strengthened by 1.8 percent in terms of the nominal effective exchange rate (Figure 6).

 

The Bank of Israel Research Department revised its staff forecast.[1]  In its assessment, GDP will grow by 5.5 percent in 2022, and by 4 percent in 2023 (Figure 11).  The adjusted employment rate is expected to continue increasing slightly, to 61 percent at the end of 2023.  The inflation rate is expected to be 3.6 percent in 2022, and 2 percent in 2023.  In addition, the debt to GDP ratio is expected to be 67 percent in 2022 and 65 percent 2023.

Economic activity remains strong.  The aggregate balance of the Central Bureau of Statistics Business Tendency Survey for March increased, and continued to reflect businesses’ positive assessments of their situation (Figure 12).According to the survey, the net balance is also positive in the hotels industry for the first time in a number of months.  In view of the continuing global production and supply chain difficulties, the intensity of the equipment and raw materials constraint reported by companies remains high, with a prominent increase in the manufacturing and construction industries.  Total credit card purchases continued to increase in March, following some moderation at the beginning of the Omicron wave.  Goods exports (excluding ships, aircraft, and diamonds) remain higher than before the crisis, and services exports remain very high (Figure 14).  Goods imports are also high in all components (Figure 15).

Labor market data for the first half of March (aged 15+) indicate further improvement.  The adjusted employment rate increased to 60.7 percent (standardized for the deviation in the original biweekly data), reflecting a gap of about 25,000 employees (0.4 percentage points) from the average employment rate in 2019 (Figure 17). The broad unemployment rate (including those temporarily absent for reasons having to do with COVID-19 and those not participating due to dismissal or the closure of the work place since March 2020) declined to 4.5 percent in March, while the narrow unemployment rate declined to 3 percent (Figure 16).  With that, the decline in the narrow unemployment rate was mainly due to the decline in labor force participation.  The number of job vacancies continued to increase in February, and remains high (Figure 18).  The number of filled employee posts (as of January 2022) has not yet returned to its precrisis level, but total demand for workers (number of job vacancies plus the number of filled positions) has returned to the trend line. Until now, the strong demand for workers has not been reflected in a significant economy-wide increase in wages. The pace of increase in nominal wages between the precrisis period and recent months (until January 2022) is similar to the trend of wage increases in the two years preceding the crisis.

The upward trend in home prices continued to accelerate in recent months, with prices rising by 13 percent in the past 12 months (Figure 9), a significantly higher pace than in previous years.  The volume of new mortgages taken out in February continued to increase, to NIS 11.2 billion (Figure 10).  Alongside this, the annual increase in rents remained relatively moderate, at about 3 percent.

There were increases in most equity indices on the domestic capital market. Government bond yields increased significantly, similar to the global trend (Figure 7).  Corporate bond spreads continued to increase moderately, but remained at low levels relative to the global increase and by historical perspective.  According to the Central Bureau of Statistics Business Tendency Survey, financing constraints among businesses of various sizes remained relatively low in all sectors.

Globally, the war in Ukraine and the slowdown in economic activity in China due to the increase in COVID-19 morbidity there and policy’s response to it, are deepening the interruptions in the global production chain, increasing inflationary pressures, and leading to some slowdown in the global pace of economic activity.  In view of this, investment houses have revised their growth forecasts downward (Figure 21).  The global purchasing managers’ index declined in March, but continues to indicate expansion of economic activity (Figure 22). Equity and commodity markets traded at high volatility in view of global events, mainly those in Europe.  At the beginning of the reviewed period, in view of concerns over the effects of the war in Ukraine, equity indices dropped sharply, but toward the end of the period, they again increased (Figure 29).  There were sharp increases in commodity prices due to the war.  In the bond markets, there were sharp increases in yields on the government bond curves in view of the increase in inflation expectations and in expectations of monetary tightening.  The volume of world trade in January, which still does not include the effects of the war in Ukraine, remain high, but an updated index by the Kiel Institute for the World Economy and the export orders component of the global purchasing managers’ index indicate a slowdown in world trade in March. The global inflation environment continues to increase. The inflation indices in most countries are significantly higher than the central bank targets, and in some of them, core inflation is also above the target, although at a lower level, due to the sharp increase in energy prices, which are netted out of the core indices.  Monetary tightening around the world therefore continues.  In the US, inflation remains high, at 7.9 percent (in CPI terms) as of February. In response, the Federal Reserve raised the federal funds rate by 25 basis points, signaled that it would begin narrowing its balance sheet in May, and revised its interest rate forecast significantly upward. In the eurozone, the rapid increase in annual inflation continued, to 7.5 percent according to the first estimate for March.  The European Central Bank left its interest rate unchanged, but accelerated the pace of tapering its purchasing program in the second quarter, and indicated that it may end in the third quarter.  Alongside this, there are increasing assessments that the ECB will begin raising its interest rate later in the year.  In a number of other countries where inflation is above the central bank target, there were increases in the interest rate (Figure 28).

 

 

 

The minutes of the monetary discussions prior to this interest rate decision will be published on April 25, 2022. The next decision regarding the interest rate will be published at 16:00 on Monday, May 23, 2022.


[1] The full staff forecast is being published separately.