To view this message as a file click here

  • Inflation in Israel is 5.2 percent over the past 12 months, and is high in a wide range of CPI components. There has been some moderation in annual inflation, but the moderation is slower than previous assessments.
  • Inflation expectations and forecasts for the first year from all sources increased, and are around the upper bound of the target range. Expectations derived from the capital market for the second year onward are all within the target range.
  • Economic activity in Israel is around the long-term trend, but its expansion has slowed relative to last year. The labor market is tight, and the employment rate remains at a level that reflects full employment. However, the job vacancy rate continues to decline moderately.
  • The Research Department has revised its macroeconomic staff forecast, and presents two potential scenarios in view of the tremendous uncertainty due to legislative processes concerning the judicial system and their economic implications.
  • Activity in the housing market is softening. The increase in home prices continues to moderate. The number of purchases and the volume of new mortgages continue to decline.  In contrast, the upward trend in rental prices continued.
  • Since the previous monetary policy decision, the exchange rates were volatile. At the end of the period, the shekel weakened by 1.5 percent against the US dollar, by 3.3 percent against the euro, and by 2 percent in terms of the nominal effective exchange rate.
  • The global inflation environment remains elevated, but is in a moderating trend. However, the core indices in various countries continued to increase.  The interest rate increases around the world are also continuing, but at a slower pace.

 

Economic activity in Israel is at a high level, and is accompanied by a tight labor market, although there is some moderation in a number of indicators. Inflation is broad and remains high. Therefore, the Monetary Committee decided to increase the interest rate. The interest rate path 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.​​​

Economic activity in Israel is at a high level, although there is some moderation in a number of indicators. The labor market remains tight and in a full employment environment. Inflation is above the target range, and encompasses a wide range of CPI components.  Annual inflation moderated in February, although at a pace that is slower than previously assessed.  The tighter monetary policy and moderation of activity abroad are expected to lead to some slowdown in economic activity in Israel, alongside a slowing of the pace of inflation.

 

Since the previous policy decision, the CPI increased by 0.5 percent in February. Inflation in the past 12 months declined slightly in February compared with the January figure, and is above the upper bound of the target range, at 5.2 percent (Figure 1). With that, inflation in Israel remains lower than in most of the advanced economies (Figure 36). Net of energy and fruits and vegetables, inflation is 5.1 percent, and the figure remains 5.1 percent with the further neutralization of the effects of taxation and regulation (Figure 2). The pace of annual inflation of the nontradable components, which mainly reflects the housing component and services industries, is 5.5 percent—similar to the previous month. In contrast, the annual pace of inflation of the tradable components declined to 4.8 percent (Figure 3).  One-year inflation expectations and forecasts from all sources increased, and are around the upper bound of the target range (Figure 6).  Expectations derived from the capital market for the second year and onward declined slightly, and are within the target range (Figure 7).  The Monetary Committee’s assessment is that the monetary tightening processes in Israel and abroad, and the moderation of demand, are working to moderate inflation.

 

Economic activity is around the long-term trend, although the pace of expansion has slowed relative to last year.  The aggregate balance of the Central Bureau of Statistics Business Tendency Survey for February continues to reflect businesses’ positive assessments of their situation (Figure 17).  Supply chain stress continues to moderate (Figure 23). The equipment and raw materials constraint reported by companies in the Central Bureau of Statistics Business Tendency Survey is in a downward trend in various industries, and in the construction industry it has returned to its pre-COVID-19 level.  Goods and services exports slowed relative to last year, but the level of activity remains high (Figure 21). At the same time, there was some worsening of the export orders constraint reported by manufacturing companies, although it remains low. In the services export industries, where the level of activity is particularly high, exports remained unchanged in January 2023 relative to December 2022, following a number of months of slight decline.  The import of consumer goods and of investment assets stabilized, and the import of raw materials continues to decline (Figure 22).  We are beginning to see a change in the trend of tax revenues, which had previously increased greatly relative to the pre-COVID-19 period.

 

The labor market remains tight, and the employment rate continues to reflect full employment. The employment rate among those aged 15 and over (61.4 percent) increased in February, and is slightly higher than its precrisis level. The employment rate among the prime working ages (25–64) is also higher than before the crisis (79 percent, Figure 25).  The unemployment rate for those aged 15+ (3.9 percent) declined relative to the previous month, while the unemployment rate among the prime working ages remained unchanged from January (3.5 percent) (Figure 26).

 

In parallel, the job vacancy rate continues to decline moderately.  Despite this decline, it remains at a high level (Figure 27).  The job vacancy rate in the high-tech industry continues to decline, in parallel to the sharp decline in capital raised relative to the high levels of 2021 and early 2022.  The rate is currently lower than the 2019 average. According to the Central Bureau of Statistics Business Tendency Survey, there was a decline in the employee shortage constraint reported by companies in February compared with same month last year. The average wage per employee post in January 2023 shows an increase in the real wage, following the decline that began in 2022.  Despite this, it remains lower than the long-term trendline (Figure 30).

 

The Bank of Israel Research Department revised its macroeconomic forecast, and presents two potential scenarios in view of the tremendous uncertainty due to the legislative processes regarding the judicial system and their economic implications.

 

  • In the scenario in which the dispute regarding the legislative changes concerning the judicial system is resolved in a way that does not have any effect on economic activity going forward, the Research Department’s analysis is carried out similar to every quarter. In this scenario, GDP is expected to grow by 2.5 percent in 2023 and 3.5 percent in 2024 (Figure 16).  The unemployment rate among the prime working ages (25–64) is expected to average 4.1 percent in 2023 and 4 percent in 2024.  The average inflation rate in the fourth quarter of 2023 is expected to be 3.9 percent, and it is expected to decline to 2.3 percent by the end of 2024.  In addition, the debt to GDP ratio is expected to be about 59 percent in 2023 and 58 percent 2024.
  • In the second scenario, the Research Department presents an analysis of the potential economic implications if the legal and institutional changes are accompanied by an increase in the country’s risk premium, a negative impact to exports, and declines in domestic investments and in demand for private consumption. This scenario is accompanied by a higher level of uncertainty than the standard forecast, regarding the intensity and persistence of the shocks. Therefore, the analysis is presented over a single three-year bloc. The forecast presents an indication of the impact on economic developments and its scale in the coming three years.  In a case where the effect of the changes subsides relatively quickly, the impact is estimated at an average of about 0.8 percent of GDP per year over the three-year period being examined.[1] In a case where the perception of the public (the financial markets, the real sector, and consumers) is that the impact of the legislative changes will persist, the impact is estimated at an average of about 2.8 percent of GDP per year over the coming three years. 

 

The volume of activity in the housing market continues to moderate.  Home prices increased by 14.6 percent in the past 12 months (Figure 12), and recent data indicate a moderation in the pace of increase, which was just 0.1 percent in February. The declines in the number of housing transactions and in the volume of new mortgages continue.  In February, new mortgage borrowing totaled NIS 5.7 billion, about half the level of February 2022 (Figure 13). Despite the decline in the number of real estate transactions, there are no apparent signs of slowdown in the labor market in the construction industry.  According to Central Bureau of Statistics data, there was a slowdown in building starts in the fourth quarter of 2022, but the annual level remained high—about 67,000 in 2022. At the same time, there was a moderate increase in building completions in 2022—about 52,000 housing units—while the number of building permits issued remains high at about 78,000 housing units. Rental prices increased by 0.5 percent in February. The housing component of the Consumer Price Index continued to rise, to 6.8 percent in the past year.

 

In the domestic capital markets there were declines in the equity indices during the reviewed period, and the Israeli equity indices reflect underperformance relative to global equity indices since the beginning of the year. Yields on long-term government bonds increased slightly, in contrast with the global trend, which is characterized by declining yields. Corporate bond spreads widened (Figure 14). According to the Central Bureau of Statistics Business Tendency Survey, the financing constraint reported by businesses remains relatively low (Figure 15). 

 

Since the previous monetary policy decision, the shekel weakened by 1.5 percent against the US dollar, by 3.3 percent against the euro, and by 2 percent in terms of the nominal effective exchange rate.  The exchange rates were volatile during the period (Figure 8).

 

Global economic activity remains moderate. This is in view of the events surrounding the collapse of Silicon Valley Bank, a bank that specialized in credit to the high-tech industry, and the increase in risk of the global banking system. In contrast, there is lower concern of a serious recession in Europe, and economic activity in China is increasing, even though the pace is more moderate than previous assessments. Investment houses revised their global growth forecasts for 2023 slightly upward for most blocs (Figure 31). The global purchasing managers’ indices of both advanced economies and emerging markets increased, with the index for advanced economies indicating economic expansion for the first time since June 2022 (Figure 32).  Data on the volume of world trade for January 2023 continued to indicate a slowdown in the pace of global activity.  The export orders component of the Purchasing Managers Index, which is a leading indicator of world trade data, indicates that in the coming months, some further moderation in the volume of world trade is expected.  The leading equity indices traded with increased volatility, and most are slightly above their levels from the beginning of the reviewed period.  Oil prices declined slightly.

 

The global inflation environment remains high but is in a trend of moderation. In most advanced economies, although overall inflation has moderated, core inflation indices continue to increase (Figure 35). Interest rate increases around the world are continuing, but the pace has slowed. In the US, activity data continue to indicate relatively strong activity, and the labor market remains tight.  The CPI was 6.0 percent in February, similar to forecasters’ projections, and the PCE index was 5.0 percent in February, slightly below previous expectations. The Federal Reserve raised the federal funds rate by 25 basis points at its last meeting. The markets expect a potential interest rate decline around the middle of the year, and the expected peak of the current interest rate cycle is lower than it was at the beginning of the reviewed period.  In the eurozone, the leading inflation figure for March surprised to the downside, with annual pace of 6.9 percent, compared with an annual pace of 8.5 percent in February.  This decline was beyond what forecasters were projecting.  In contrast, core inflation in the eurozone continued to increase.  The ECB increased its interest rate by 50 basis points.  In the UK, the moderating trend of inflation was halted, and inflation again increased to 10.4 percent, compared to forecasters’ projections for continued moderation.  The Bank of England increased its interest rate by another 25 basis points.

 

The minutes of the monetary discussions prior to this interest rate decision will be published on April 17. The next decision regarding the interest rate will be published at 16:00 on Monday, May 22, 2023.

 

[1] The analysis in this scenario is based on the quarterly model used to analyze business cycles and for the Research Department’s forecasts published on a quarterly basis.  Therefore, the forecast deals only with a range of three years.  An analysis of the potential long-term effects must be based on a long-term economic growth model.