The Monetary Committee decides on August 29, 2018 to keep the interest rate unchanged at 0.1 percent
- The rise in the inflation environment continues, supported by the accommodative monetary policy, and it appears that the inflation environment is moving toward entrenchment within the price stability target range. Inflation over the past 12 months is in the lower part of the target range, and 1-year inflation expectations are around its lower bound. The main risk to the entrenchment of inflation within the target is the possibility of a sharp appreciation in the shekel.
- Although second quarter growth was relatively low, it apparently does not indicate a change in trend, with most of the decline in growth deriving from fluctuations in vehicle imports. Current indicators of activity support the assumption that the economy has returned to a faster pace of growth in the third quarter. The labor market remains tight, and wages continue to rise at a solid pace, particularly in the business sector.
- The growth rate of the global economy increased in the second quarter, but weakness in momentum is apparent, and the growth rate of world trade continues to slow. US inflation is ranging around the two percent target, and the Federal Reserve is expected to raise its interest rate twice more in 2018. In Europe and Japan, core inflation remains low and the accommodative monetary policy continues.
- The shekel remains stable against major currencies. Since the previous interest rate decision, there has been an appreciation of about 2.3 percent in terms of the nominal effective exchange rate, mainly as a result of the weakening of emerging market currencies.
- The downward trend in home prices, which began approximately a year ago, has halted. The increase in new mortgage volume continues, and mortgage interest rates remain stable.
The Monetary Committee intends to maintain the accommodative policy as long as necessary in order to entrench the inflation environment within the target range. The Bank of Israel continues to monitor developments in inflation, the real economy, the financial markets, and the global economy, and will act to attain the monetary policy targets in accordance with such developments.
The rise in the inflation environment continues, supported by the accommodative monetary policy, and it appears that the inflation environment is moving toward entrenchment within the price stability target range. In the 12 months ending in July, the inflation rate was 1.4 percent, and for the past two months annual inflation has been in the bottom part of the target range. Part of the increase in inflation derives from volatile components of the CPI, such as energy prices and the fruit and vegetables component (Figure 1 in the attached data file), but the upward trend in inflation extends to adjusted indices as well (Figure 2). The rate of inflation in the prices of tradable goods turned positive for the first time since 2013, impacted by the rise in energy prices and the cumulative depreciation of the shekel against the dollar (Figure 3). One-year inflation expectations from the various sources are around the lower bound of the target range (Figure 4). Forward expectations for medium terms are entrenched within the target, while longer term expectations are anchored near the midpoint of the target range (Figure 5). The shekel remains stable against major currencies. However, since the last interest rate decision there has been an appreciation of approximately 2.3 percent in terms of the effective exchange rate, mostly due to the sharp weakening of the Turkish lira (Figure 6). The increase in wages, the strong private consumption, and the expansionary fiscal policy will support a continued increase in inflation. The main risk to the entrenchment of inflation within the target range is the possibility of a sharp appreciation in the shekel.
After the previous interest rate decision, government bond yields declined slightly, and they remain lower than yields in the US and higher than yields in Europe (Figure 7). The yield spreads between corporate bonds and parallel government bonds remain low (Figure 8).
According to the first estimate of second quarter National Accounts data, the growth rate slowed, though apparently it is not a change in trend, and in general the economy continues to grow at around its potential pace (Figure 11). The decline in growth derives mainly from fluctuations in vehicle imports, while the contraction in services exports data follows an extended period of solid growth (Figure 13). Current private consumption is growing at a solid and stable pace. In contrast, investment in residential construction continues to contract (Figure 12). Current indicators of activity support the assumption that in the third quarter the economy will return to a faster pace of growth, as can be seen in the Business Tendency Survey and the Composite State of the Economy Index (Figure 14). The labor market remains tight: the unemployment rate is very low, and the participation and employment rates are at high levels (Figure 15). Wages continue to increase at a solid pace (Figure 16), especially in the business sector.
The downward trend in home prices that began approximately a year ago has halted (Figure 9). The number of transactions by first home buyers and by buyers upgrading their homes increased slightly, after a prolonged decline. The increase in new mortgage volume continued, and mortgage interest rates remained stable (Figure 10).
The rate of global growth picked up in the second quarter, but weakness in momentum is apparent. In particular, the growth rate of world trade continues to slow (Figure 18), against the background of concerns of an increase in the severity of the trade war and the volatility in emerging economies’ financial markets. In contrast, the positive trend in the US equity market continues (Figure 22). The IMF kept its global growth forecast unchanged, even though growth projections for the eurozone and Japan declined slightly (Figure 17). US inflation is ranging around the target of 2 percent. Inflation rose in Europe and Japan as well, but core inflation remains low (Figure 19). Activity data for the US indicate continued positive momentum, supported by the fiscal expansion. The labor market, private consumption, and industrial production continue to display resilience. The monetary contraction is expected to continue, with the Federal Reserve expected to raise its interest rate twice more in 2018. In Europe, growth is stabilizing at a rate slightly lower than that of 2017, and the accommodative monetary policy continues. Even though the ECB is due to stop the quantitative easing at the end of the year, it is not expected to raise the interest rate before the fall of 2019. In Japan, growth recovered in the second quarter. Capital outflows and concern of a trade war continue to weigh on emerging economies. The slowdown in growth in China led the government there to announce steps supporting growth. Turkey’s economy is in a severe crisis, but its effect on the global economy is relatively small. Oil prices declined slightly after prolonged increases over the past year.
The minutes of the monetary discussions prior to this interest rate decision will be published on September 12, 2018. The next decision regarding the interest rate will be published at 16:00 on Monday, October 8, 2018, followed by a press briefing by the Governor.