- Inflation in Israel is above the upper bound of the target range, at 5.2 percent over the past 12 months. The increase in inflation is broad-based, with contributions from most CPI components.
- Economic activity in Israel remains strong and the labor market remains tight and is in a full employment environment. GDP grew by 6.8 percent in the second quarter. Most GDP components grew significantly. GDP is above the precrisis trend line.
- One-year inflation expectations from the various sources declined, and are within the target range. Expectations derived from the capital market for the second year onward remain within the target range, and long-term expectations are anchored at the midpoint of the range.
- Since the previous monetary policy decision, the shekel strengthened by 6.9 percent against the US dollar, by 10.2 percent against the euro, and by 8.8 percent in terms of the nominal effective exchange rate.
- The upward trend in home prices continues to accelerate, with prices increasing 17.8 percent in the past 12 months. There was also a rise in the monthly pace of rent price increases, which reached 0.7 percent in July.
- Global economic activity continues to moderate, in view of the high inflation and monetary tightening, the continuing war in Ukraine and energy crisis in Europe, the slowdown in China, and difficulties in the production chain.
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 to continue the 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.
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Economic activity in Israel remains strong, and the labor market remains tight and in a full employment environment. However, the continued moderation of global activity, as well as political uncertainty in Israel, may weigh upon economic activity. Inflation continues to increase, and is above the target range. However, it is within the lowest decile among the OECD countries (Figure 31).
Since the previous interest rate decision, the CPI increased by 0.4 percent in June and by 1.1 percent in July, and inflation in the past 12 months is above the upper bound of the target range, at 5.2 percent (Figure 1). With that, inflation in Israel remains significantly lower than in most of the advanced economies (Figure 31). Net of energy and fruits and vegetables, inflation is 4.7 percent, and with the further neutralization of the effects of taxation and regulation, it is 4.4 percent (Figure 2). The annual pace of inflation, of the tradable components is high, at about 7 percent, and it continued to increase. The pace of inflation of the nontradable components also increased, but is lower, at about 4.1 percent (Figure 3). The increase in inflation is broad-based, with contributions from most CPI components. In the Committee’s assessment, alongside the process of raising the interest rate, the easing of the supply chain difficulties, declines in the prices of oil and some other commodities and in the excise tax, and the strengthening of the shekel will work to moderate inflation. One-year inflation expectations from the various sources declined, and all of them except for the expectations derived from the capital market are within the target range (Figure 4). Expectations derived from the capital market for the second year and onward remain within the target range, and long-term expectations are anchored at the midpoint of the range (Figure 5). Since the previous monetary policy decision, the shekel strengthened by 6.9 percent against the US dollar, by 10.2 percent against the euro, and by 8.8 percent in terms of the nominal effective exchange rate (Figure 6).
Economic activity is strong. Following the publication of National Accounts data for the second quarter and the revision of 2021 data by the Central Bureau of Statistics, GDP in the past three quarters has been higher than the precrisis trend line (Figure 14). According to the first estimate of National Accounts data for the second quarter, GDP in the quarter grew by 6.8 percent relative to the first quarter of 2022 (Figure 12). The growth in GDP was broad-based (Figure 13). Private consumption, investment, and exports increased at double-digit rates. Compared to the second quarter of 2021, GDP has grown by 7.4 percent.
Indicators of economic activity in the third quarter also continue to show increased activity. While the aggregate balance of the Central Bureau of Statistics Business Tendency Survey declined in July, it remains higher than the precrisis average, and continues to reflect businesses’ positive assessments of their situation (Figure 15). Credit card purchases remained high in July and August. Due to the easing of pressure in the global supply chains, the magnitude of the equipment and raw materials constraint eased in both the manufacturing and construction industries. However, the level of the constraint remains significant, and higher than in the past. Goods exports (excluding ships, aircraft, and diamonds) declined, but remain higher than before the pandemic, and services exports remain very high (Figure 16). Goods imports are also high in all components (Figure 17).
The labor market is tight. The unemployment rate for those aged 15+ was 3.4 percent (seasonally adjusted), and the employment rate (61 percent) has been stable for a number of months, and is around its 2019 average levels. The employment rate among the prime working ages (25–64) is higher than its 2019 average (Figure 22). The number of job vacancies and the job vacancy rate are very high, despite some decline in July. Businesses in most industries continue to indicate a shortage of workers as a constraint on their current operations (Figure 23). The tight labor market is also reflected in some wage pressures in the business sector (Figure 24), mainly in industries that generally feature high wages and professional employees. Wages in the public sector are increasing more moderately.
Home prices increased by 17.8 percent in the past 12 months (Figure 9), a significantly higher pace than in previous years. However, the number of transactions declined in recent months, and the number of building starts and building permits is high, following increases in the first quarter. The volume of new mortgages taken out declined in July, to about NIS 10 billion, but it remains historically high (Figure 11). There was also a rise in the monthly pace of rent price increases, which reached 0.7 percent in July.
In the domestic capital market there were increases in the equity indices, similar to the global trend. Yields on long-term government bonds declined, and corporate bond spreads remained virtually unchanged (Figure 10). According to the Central Bureau of Statistics Business Tendency Survey, financing constraints among businesses of various sizes remained relatively low in all sectors (Figure 18).
Global economic activity continues to moderate, in view of high inflation, monetary tightening, the continuing war in Ukraine and the energy crisis in Europe, the slowdown in China, and the supply chain difficulties. The International Monetary Fund (IMF) revised its global growth forecast downward to 3.2 percent in 2022 and 2.9 percent in 2023 (Figure 27). The volume of world trade increased in May, but its pace of growth since the beginning of the year is lower than it was in 2021. The global purchasing managers’ index of advanced economies declined in July, and indicates a continued slowdown of economic activity, while the index for the emerging markets declined, but indicates expansion (Figure 28). Nevertheless, there were sharp price increases in the equity markets (Figure 36). Oil prices declined in view of expectations of a continued slowdown in global economic activity and a decline in demand. In contrast, due to the decline in the flow of natural gas from Russia to Europe, there was a sharp increase in natural gas prices in Europe. The index of commodity prices returned to the level it was at the beginning of the year (Figure 34). There was a mixed trend in government bond markets, with high volatility.
The global inflation environment continued to increase. In most countries, the inflation indices are significantly higher than the central bank targets. Monetary tightening around the world therefore continues. In the US, second quarter growth data indicate the beginning of a “technical recession”, but the labor market is tight and wage increases accelerated further. Inflation declined to 8.5 percent in view of the decline in energy prices, but remains very high. In its most recent meeting, the Federal Reserve raised the federal funds rate by 75 basis points, for the second consecutive time, and emphasized its commitment to lower inflation. Growth data in the major economies in the eurozone were relatively high, except for Germany. The rapid increase in inflation continues, and the European Central Bank accelerated its monetary tightening and increased its interest rate by 50 basis points, the first increase since 2011. In a number of other countries where inflation is above the central bank target, there were increases in the interest rates (Figure 33).
The minutes of the monetary discussions prior to this interest rate decision will be published on September, 5, 2022. The next decision regarding the interest rate will be published at 16:00 on Monday, October 3, 2022, followed by a press briefing with the Governor.