The Monetary Committee decides on February 24, 2020 to keep the interest rate unchanged at 0.25 percent
- The inflation environment continues to be low. The January CPI was lower than expected, and inflation over the past 12 months remains 0.3 percent. Inflation excluding energy and fruits and vegetables also remains low. The moderation of inflation is largely influenced by the appreciation of the shekel. It is possible that in the coming months, the year over year inflation rate will be negative, but it is expected to move back toward the lower bound of the target range in the second half of the year.
- Since the previous interest rate decision, the shekel has strengthened by approximately 3 percent in terms of the nominal effective exchange rate, a development that continues to weigh on the return of inflation to the target range.
- The economy continues to grow at around its long-term growth rate. According to the Research Department’s assessment, the growth rate in the fourth quarter, net of the volatility in vehicle imports, was about 3.5 percent, and the growth encompassed virtually all sectors. Indicators of economic activity in January point to continued growth, and the labor market remains tight. The interim budget is expected to have a markedly contractionary effect in the first half of 2020, and there is continuing uncertainty regarding budgetary policy after the elections.
- The most recent data published regarding global economic activity indicate low growth in Europe and negative growth in Japan, while the US continues to exhibit positive growth. Global growth forecasts for 2020 were revised slightly downward, and the slowdown in world trade continues.
- The outbreak of the coronavirus in China is casting uncertainty regarding future economic activity globally and in Israel, and regarding the impact on inflation and on the financial markets. The baseline scenario guiding the assessments of most international financial institutions is that the spread of the virus will be halted in the coming months, and the overall impact on the global economy is expected to be limited. The Bank of Israel’s assessment in this scenario is that no significant macroeconomic impact is expected in Israel. If the crisis persists and spills over into additional countries, and particularly if strict preventative measures are required in Israel, it is expected to have a more significant impact. In such a scenario, the Monetary Committee has a range of tools to make monetary policy more accommodative.
The Monetary Committee's assessment is that in view of the inflation environment in Israel, the monetary policies of major central banks, developments in the global economy and the risks to the domestic economy, and the development of the exchange rate, it will be necessary to leave the interest rate at its current level for a prolonged period or to reduce it in order to support a process at the end of which inflation will stabilize around the midpoint of the target range, and so that the economy will continue to grow strongly. Furthermore, the Committee is taking additional steps to make monetary policy more accommodative. 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, clickhere.
The inflation environment continues to be low. The CPI reading for January declined by 0.4 percent, a greater decline than expected, and year over year inflation remained below the target range. In the past 12 months, the inflation rate was 0.3 percent (Figure 1 in the attached file of figures), and inflation excluding energy and fruit and vegetables stabilized at a low level, which indicates a low basic inflation rate (Figure 2). The moderation of inflation does not reflect weakness in demand, and is largely influenced by the appreciation of the shekel. Inflation of nontradable goods prices remained moderate, and inflation in the prices of tradable goods remained negative. Inflation is expected to remain low in the coming months, and may even become negative, but it is expected to move back toward the lower bound of the target range in the second half of the year. Most one-year forecasts and expectations remain around the lower bound of the target range or slightly below it (Figure 4). Medium-and long-term forward inflation expectations derived from the capital market continue to be largely stable since the previous interest rate decision (Figure 5). An analysis of the risk premium in 5–10-year expectations shows that excluding the premium, inflation is expected to be above 2 percent in this range. Since the previous interest rate decision, the shekel has strengthened by about 3 percent in terms of the nominal effective exchange rate (Figure 6), a development that continues to make it difficult to return inflation to the target range.
The economy continued to grow at a stable pace around the long-term growth rate. According to the first estimate of National Accounts data for the fourth quarter, GDP grew by 4.8 percent (Figure 11), while according to an assessment by the Bank of Israel’s Research Department, the growth rate net of volatility in vehicle imports was about 3.5 percent. The growth encompassed virtually all sectors. Exports (excluding diamonds and startups) grew by 5 percent, driven by services exports, but the prolonged weakness in goods exports continues. Investment grew by 5.9 percent, while investment in residential construction again contracted (Figure 12). The Business Tendency Survey (Figure 13) and the Composite State of the Economy Index (Figure 14) for January point to continued solid growth at the beginning of 2020. The labor market remains tight: The unemployment rate remained low, while the employment and participation rates increased (Figure 17). Wage increases continue, but their rate of growth slowed somewhat (Figure 19). The interim budget is expected to have a markedly contractionary effect in the first half of 2020, and uncertainty remains regarding budgetary policy following the elections and its implications for economic activity and inflation.
For most of the period since the previous interest rate decision, equity markets in Israel were relatively stable, but in recent days, there have been sharp price declines. Long-term government bond yields declined since the previous interest rate decision, similar to declines in yields in Europe and the US, and the declines have grown stronger in recent days (Figure 7).
Home prices increased in the past year by about 3 percent. The number of home purchases grew, led by first-home purchasers and buyers upgrading their housing situation. Mortgage volume continued to expand, with some increase in leverage levels, and mortgage interest rates continued to decline.
The most recent data published regarding global economic activity indicate low growth in Europe and negative growth in Japan, while the US economy continues to exhibit positive growth. Investment houses’ global growth forecast for 2020 were revised slightly downward, while the revision for growth in China is more significant (Figure 20). The slowdown in world trade continues (Figure 21), but the political risks have moderated in view of the signing of the first stage of the trade agreement between the US and China, and the decline in uncertainty surrounding the progress of the Brexit process. Headline inflation in the major economies increased, but inflation continues to be lower than the central banks' guiding targets (Figure 23). The US economy grew by 2.1 percent in the fourth quarter of 2019. The Federal Reserve kept the federal funds rate unchanged, and signaled that the rate is expected to remain at its current level unless there is a significant change in the state of the economy. In Europe, growth remains low, with contraction in France and Italy, and near-zero growth in Germany, and the manufacturing sector continues to weigh on activity. The ECB left its interest rate unchanged, and signaled that it expects to leave its policy in place for a considerable time. In Japan, there was significantly negative growth in the fourth quarter following a number of one-off effects, and there are signs that the slowdown will continue. Data on 2019 activity in China were positive, but the long-term trend of moderation continues, and the outbreak of the coronavirus is expected to weigh on growth in Asia at least in the short term. Prices of oil and commodities used in manufacturing declined in view of an expectation of a significant decline in demand from China (Figure 24).
The outbreak of the coronavirus in China is casting uncertainty over a range of areas—future economic activity globally and in Israel, and the impacts on inflation and on the financial markets. The baseline scenario guiding the assessments of most international financial institutions is that the spread of the virus will be halted in the coming months, and the damage to the Chinese economy will be restricted mainly to the first quarter of 2020. In this scenario, the growth rate in later quarters is expected to compensate, so that the overall effect on the global economy will be limited. According to the Bank of Israel’s assessment, beyond the impact on specific companies, this scenario is not expected to have a significant macroeconomic effect in Israel, even though China is a significant trading partner in a range of industries. If the crisis persists and flows over into other countries, and particularly if strict preventive measures will be required in Israel, it is expected to have a more significant impact, the scope of which is difficult to assess at this stage. The decline in global demand for various goods is expected to slow the rate of inflation, but on the supply side, the shortage of goods and raw materials imported from China may serve to increase inflation somewhat. Until recently, the reaction in the financial markets was moderate, but in recent days, the uncertainty has increased and there have been sharp declines in equity markets.
The minutes of the monetary discussions prior to this interest rate decision will be published on March 9, 2020. The next decision regarding the interest rate will be published at 16:00 on Monday, April 6, 2020, followed by a press briefing by the Governor.