The Monetary Committee decides on January 2, 2023 to increase the interest rate by 0.5 percentage points to 3.75 percent
- Inflation in Israel is 5.3 percent over the past 12 months, and is high in a wide range of CPI components. However, there has been some moderation in some components. Inflation expectations for all ranges are within the target range.
- Economic activity in Israel remains strong, but the growth rate appears to have slowed relative to the first half of 2022. The labor market remains tight, although in recent months there has been some moderation in employment data.
- The Research Department has revised its macroeconomic staff forecast. In its assessment, GDP is expected to grow by 2.8 percent in 2023, and by 3.5 percent in 2024. The level of economic activity derived from the forecast remains strong, particularly by international comparison.
- Home prices increased in the past 12 months by a significantly high rate. However, the numbers of building starts and permits remain higher than in the past, the number of home purchases continues to decline, and the volume of new mortgages taken out is close to its average precrisis level.
- Since the previous monetary policy decision, the shekel weakened by 1.6 percent against the US dollar, by 5.8 percent against the euro, and by 3.4 percent in terms of the nominal effective exchange rate.
- The slowdown in economic activity abroad continued, and the risk of a recession is increasing in many countries. The inflation environment remains high, but in the US, the trend of moderation of inflation continues, and there are initial signs of moderation in inflation in the eurozone and in Britain.
The Israeli economy is recording strong economic activity, 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.
Economic activity in Israel remains strong, and the labor market remains tight and in a full employment environment, although the most recent data indicate some moderation. Inflation is above the target range, and encompasses a wide range of CPI components. However, there has been some moderation in some of the CPI components, mainly the tradable components. Monetary policy tightening and moderation of activity abroad are expected to lead to some slowdown in economic activity in Israel as well.
Since the previous policy decision, the CPI increased by 0.1 percent in November. Inflation in the past 12 months is above the upper bound of the target range, at 5.3 percent (Figure 1). With that, inflation in Israel remains lower than in most of the advanced economies (Figure 34). Net of energy and fruits and vegetables, inflation is 5.3 percent, and with the further neutralization of the effects of taxation and regulation, it is 5.1 percent (Figure 2). The pace of inflation of the nontradable components is 5.3 percent—partly in view of the increase in the housing services component. The annual pace of inflation of the tradable components is also 5.3 percent, after declining slightly relative to the previous month (Figure 3). In recent months, there have been signs of a slowdown in the dynamic of the increase in inflation (Figure 4). For instance, the continuing downward trend in the price of oil, in view of the decline in global demand, and the easing of the supply chain difficulties are expected to continue working to lower the prices of tradable goods, but with some lag and depending on developments in the exchange rate.
One-year inflation expectations and forecasts from all sources are within the target range (Figure 6). Expectations derived from the capital market for the second year and onward are also within the target range (Figure 7). In the Committee’s assessment, these trends and the process of monetary tightening in Israel and abroad, as well as the moderation of demand, are working to moderate inflation. However, the extent of fiscal expansion and the development of wages will have an impact on the pace of inflation’s convergence to the target range.
Economic activity is strong, although the pace of growth seems to have slowed relative to the first half of 2022. The aggregate balance of the Central Bureau of Statistics Business Tendency Survey for declined in November, but continues to reflect businesses’ positive assessments of their situation (Figure 18). Credit card purchase data are in line with the long-term trends (Figure 20). Companies in the manufacturing and construction industries continue to report an easing of the equipment and raw materials constraint, in view of the moderation of pressure in the global supply chains, which is partly due to a decline in global demand. However, the equipment and raw materials constraint, mainly in the manufacturing industry, remains higher than it was prior to the COVID-19 crisis (Figure 24). Despite the decline in global demand, companies in Israel reported a slight increase in the intensity of the lack of export orders constraint on their activity. Goods exports (in nominal terms, excluding ships, aircraft, and diamonds) declined by 11 percent in November compared with the previous month, but remain higher than before the pandemic, and services exports are very strong even though the most recent figure for October was slightly low (Figure 21). Goods imports are also high in all components (Figure 22).
The labor market remains tight, but in recent months there has been a slight moderation in employment data. The employment rate among those aged 15 and over (60.6 percent) declined slightly, and is slightly lower than its precrisis level. The employment rate among the prime working ages (25–64) remains high (78.2 percent), but the most recent data show some decline (Figure 25).The unemployment rate for those aged 15+ (3.9 percent) and among the prime working ages (3.5 percent) have been in an upward trend since June 2022 (Figure 26). In parallel, the demand for workers remains high. The number of job vacancies and the job vacancy rate declined in November, but remain historically high (Figure 27). According to the Central Bureau of Statistics Business Tendency Survey, the decline in businesses’ expectations of expanding their employee numbers continued in November, but there is a high level of variance between industries (Figure 19). The annual pace of increase in nominal wages remains high, influenced by increases in the business sector, mainly in the high-tech industries, alongside wage stability in the public sector. Wages in the high-tech industries are higher than expected based on the precrisis trend, but in the past three months they have not continued to increase. According to Central Bureau of Statistics flash surveys for October, real wages are slightly lower than their long-term trend (Figure 28).
The Bank of Israel Research Department revised its macroeconomic forecast. In its assessment, GDP will grow by 2.8 percent in 2023 and 3.5 percent in 2024 (Figure 17). The level of economic activity derived from the forecast remains strong, particularly by international comparison. The unemployment rate among the prime working ages (25–64) is expected to average 4 percent in both 2023 and 2024. The average inflation rate in the fourth quarter of 2023 is expected to be 3 percent 2023, and is expected to decline to 2 percent in 2024. In addition, the debt to GDP ratio is expected to be 62 percent in 2023 and 61 percent in 2024.
Home prices increased by 20.3 percent in the past 12 months (Figure 12), a significantly higher pace than in previous years. Building starts and permits remain higher than in the past. The number of housing transactions continues to decline, and the volume of new mortgages taken out is close to its average precrisis level (Figure 13). Rents increased by 0.5 percent in November. The annual pace of increase in the housing component of the Consumer Price Index continued to rise, to 6.4 percent in November.
In the domestic capital market there were declines in the equity indices, and yields on long-term government bonds increased significantly (Figure 9). Since the beginning of the monetary tightening process, there has been some slowdown in credit, mainly to small and medium businesses, alongside an increase in the interest rates on credit. According to the Central Bureau of Statistics Business Tendency Survey, the financing constraints reported by small and medium businesses have increased in recent months, but the financing constraint remains low (Figure 16). At this stage, there are no indications of a significant increase in credit risk or in businesses’ difficulties in servicing their debts.
Since the previous monetary policy decision, the shekel weakened by 1.6 percent against the US dollar, by 5.8 percent against the euro, and by 3.4 percent in terms of the nominal effective exchange rate (Figure 8).
The slowdown in global economic activity continues, and the risk of a recession is increasing in many countries. This is in view of the continuing conflict in Ukraine and the energy crisis in Europe, high inflation and monetary tightening, and the slowdown in China due to the increase in COVID-19 morbidity. In contrast, growth figures recorded thus far for 2022 were higher than expected, and the easing of the supply chain difficulties continues, with a decline in shipping costs. Investment houses revised their global 2023 and 2024 growth forecasts for the various blocs downward (Figure 29). The global purchasing managers’ indices of both advanced economies and emerging markets indicate a further slowdown in the pace of economic activity (Figure 30). The volume of world trade declined in October.
There were price declines in the main global equity indices (Figure 38), mainly following the interest rate decisions by the Federal Reserve and the European Central Bank. Government bond yields increased, particularly in Europe and Japan. Oil prices declined, and there was a sharp decline in natural gas prices in Europe.
The global inflation environment remains high. However, in some countries, particularly the US, there is a perceptible downward trend. There are also initial indications of moderation in inflation in the eurozone and in Britain. In contrast, core inflation remains stable. In most countries, the inflation indices are significantly higher than the central bank targets (Figure 33), and monetary tightening around the world continues. However, the leading central banks are slowing their pace of interest rate increases. In the US, the increase in the CPI declined to 7.1 percent in November, lower than previous forecasts. The Federal Reserve slowed the pace of increase in the federal funds rate, raising the rate by 50 basis points at its last meeting, and noted that it is preferable to move to a more moderate pace of increases in order to bring about a better balance of risks. However, the Fed increased its assessment regarding the interest rate at the end of 2023, and the median assessment is for a rate of 5.1 percent. In the eurozone, inflation moderated to 10.1 percent in November, lower than the previous forecast. The ECB also slowed its pace of interest rate increases, raising the rate by 50 basis points. In addition, the ECB announced a reduction of its balance sheet, and expectation of continued monetary tightening. In response, there was an increase in the interest rate expectation for Europe priced in by the market for 2023.
The minutes of the monetary discussions prior to this interest rate decision will be published on January 16. The next decision regarding the interest rate will be published at 16:00 on Monday, February 20, 2023.