- The inflation environment stabilized slightly above the lower bound of the target range. In the past 9 months, except for December 2018, the annual inflation rate has been 1.2 percent or higher. In the coming months, annual inflation is expected to be slightly above the lower bound of the target, and 1-year expectations and forecasts from the various sources hover near it. Medium-term and long-term forward expectations are slightly below the midpoint of the target.
- In the fourth quarter of 2018, the economy grew at a rate in line with the long term pace, and indicators of activity support the assessment that the economy continued to grow at a solid pace in the first quarter as well. Labor market data show that it remains tight: the unemployment rate declined slightly, the employment rate stabilized at a record high level, and the increase in wages continues. However, several indicators point to a possible moderation in the labor market.
- The global macroeconomic picture continues to point to moderation in the growth and inflation rates, and growth forecasts for most regions were revised downward again. The slowdown in world trade is becoming more severe, and includes emerging markets as well. Major central banks signaled that the process of monetary contraction will cease for now.
- Since the last interest rate decision, the shekel strengthened by 1.2 percent in terms of the nominal effective exchange rate. If the appreciation continues, it could delay the inflation rate’s rise toward the midpoint of the target.
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. The Bank of Israel continues to monitor developments in inflation, the real economy, fiscal policy, 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 figures accompanying this notice, click here.
The inflation environment stabilized slightly above the lower bound of the target range. The CPI for February increased by 0.1 percent, higher than the assessments prior to its publication, and in the past 9 months, excluding December, the annual inflation rate was 1.2 percent or higher (Figure 1 in the attached file of figures). The adjusted indices are near the lower bound of the target range (Figure 2). Inflation in nontradables, an approximation of the domestic component of inflation, continued to increase, reaching approximately 2.5 percent, while inflation in tradables continued to decline, reaching a negative annual rate of -0.7 percent (Figure 3). In the coming months, inflation is expected to be slightly above the lower bound of the target, and 1-year expectations and forecasts from the various sources are hovering near it (Figure 4). According to the Research Department's staff forecast, inflation in the next four quarters is expected to be 1.3 percent. Medium-term and long-term forward expectations are slightly below the midpoint of the target range (Figure 5). Since the previous interest rate decision, the shekel appreciated by 1.2 percent in terms of the nominal effective exchange rate. It strengthened by 0.5 percent against the dollar, and by 1.7 percent against the euro (Figure 7) If the appreciation continues, it could delay the inflation rate’s rise toward the midpoint of the target.
Trading on equity indices in Israel was mixed since the previous interest rate decision, and at the end of the first quarter of 2019, the declines from the fourth quarter of 2018 had been largely offset (Figure 8). The gap between government bond yields in the US and the yields on parallel bonds in Israel narrowed slightly (Figure 9). Yield spreads between corporate bonds in Israel and comparable government bonds continued to decline (Figure 10).
The second estimate of National Accounts data by the Central Bureau of Statistics also shows that economic growth in the fourth quarter of 2018 was in line with the long-term rate, and it is clear that the slowdown in mid-2018 was transitory (Figure 13). Most of the indicators of economic activity support the assessment that the economy continued to grow solidly in the first quarter: The Composite State of the Economy Index for February increased by 0.3 percent, similar to its rate of increase during 2018 (Figure 14), and there is a slight recovery apparent in goods exports (Figure 15). Labor market data indicate that it remains tight—the unemployment rate declined slightly, the employment rate is stable at a record high level (Figure 17), and wage increases are continuing, led by the business sector (Figure 18). These factors support the assessment that the economy remains in a full employment environment. However, some industries are showing an apparent slight easing in the labor shortage constraint as reported by employers, and the job vacancy rate remains elevated but is declining moderately. According to the Research Department's staff forecast, GDP is expected to grow in 2019 by 3.2 percent, a slightly lower rate than in the previous forecast, and by 3.5 percent in 2020. The economy is expected to grow in those years at a rate slightly higher than the long-term pace, as a result of significant activity by a number of large companies.
In the past year, home prices declined by approximately 0.7 percent (Figure 11). The number of transactions continued to increase, particularly among first-time home buyers, alongside the prolonged decline in investment in residential construction. Mortgage volume continues to expand, and mortgage interest rates remained stable (Figure 12).
The global macroeconomic picture continues to indicate moderation in both the growth and inflation rates. The main risks include a possible escalation of the trade war (despite progress in contacts between the US and China), and concern over a no-deal Brexit in the UK. Investment houses again revised their growth forecasts downward for most regions, particularly for Europe (Figure 19). The slowdown in world trade is worsening, and includes the emerging economies (Figure 20). In the financial markets, there were increases in the equity indices (Figure 21), and declines in government bond yields in view of the expectation that the process of global monetary contraction will be halted for now. In the US, the pace of inflation moderated, and the Fed left the federal funds rate unchanged (Figure 22), and interest rate forecasts were revised downward. In addition, the Fed announced its intention to end its balance-sheet contraction earlier than had been expected. In Europe, economic activity continues to lose momentum and sentiment indices continue to weaken. The ECB left its interest rate unchanged, and revised its growth and inflation forecasts downward, but noted that the chances of falling into a recession are very low. In addition, the ECB renewed its program of providing credit to the commercial banks in order to support economic activity in the eurozone. In the UK, risk remained high due to Brexit, and uncertainty is expected to weigh on economic activity in the coming months. In Japan, economic activity has moderated since the beginning of the year, following some recovery in the fourth quarter of 2018. There is relative stability in emerging markets, although economic activity is expected to moderate. Growth in China continued to weaken in the first quarter. Oil prices continued to increase, impacted by the decline in supply, further to the sharp increases since the beginning of the year (Figure 24).
The minutes of the monetary discussions prior to this interest rate decision will be published on April 18, 2019. The next decision regarding the interest rate will be published at 16:00 on Monday, May 20, 2019.