- Inflation in Israel is above the upper bound of the target range, at 4.1 percent over the past 12 months. With that, it remains significantly lower than in most advanced economies.
- One-year inflation expectations are above the upper bound of the target range. However, expectations for the second year derived from the capital market have returned to within the target range, and expectations from the third year onward have converged back to the midpoint of the range.
- Economic activity in Israel is continuing at a high level and the labor market remains tight. However, the possible slowdown in global economic activity in view of the effects of the war in Ukraine and the slowdown in manufacturing activity in China, as well as the political uncertainty in Israel, may have a negative impact on economic activity.
- The labor market is in a full employment environment. Businesses in most industries continued to indicate a shortage of workers as a constraint on their current operations. The tight labor market is leading to some wage pressures in the business sector.
- Since the previous monetary policy decision, the shekel has weakened by 5.1 percent against the US dollar, by 2.9 percent against the euro, and by 3.6 percent in terms of the nominal effective exchange rate.
- The Research Department revised its forecast. Its assessment is that GDP will grow by 5 percent in 2022 and by 3.5 percent in 2023. The inflation rate is expected to be 4.5 percent in 2022, and to decline to 2.4 percent in 2023.
- Home prices increased by 15.4 percent in the past 12 months, a significantly higher rate than in past years, but the sharp upward trend of annual price increases moderated slightly.
In addition to the decision on the interest rate, the Bank of Israel announces an expansion of the spread around the Bank of Israel interest rate (the corridor) in the credit window and in the deposit window to commercial banks from ±0.1 percent to ±0.5 percent.
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.
For the file figures accompanying this notice, click here
Economic activity in Israel is continuing at a high level, and the labor market remains tight and in a full employment environment. However, the continued moderation of global activity in view of the effects of the war in Ukraine and the slowdown in manufacturing activity in China, as well as political uncertainty in Israel, may weigh upon economic activity. In addition, the economy is in the midst of another COVID-19 wave, though it is not having any material effect on economic activity.
Since the previous interest rate decision, the CPI increased by 0.6 percent in May, and inflation in the past 12 months is above the upper bound of the target range, at 4.1 percent (Figure 1). With that, inflation in Israel is significantly lower than in most of the advanced economies (Figure 28). Net of energy and fruits and vegetables, inflation is 3.6 percent, and with the further neutralization of the effects of taxation and regulation, it is 3.4 percent (Figure 2). The annual pace of inflation, in both the nontradable and the tradable components, continued to increase (Figure 3). Inflation expectations for the coming year from the various sources are above the upper bound of the target range (Figure 4). However, expectations derived from the capital market for the second year returned to within the target range, and expectations from the third year onward converged back to the midpoint of the target range (Figure 5). Since the previous monetary policy decision, the shekel has weakened by 5.1 percent against the US dollar, by 2.9 percent against the euro, and by 3.6 percent in terms of the nominal effective exchange rate (Figure 6).
Indicators of economic activity continue to point to strong activity. The aggregate balance of the Central Bureau of Statistics Business Tendency Survey increased in May, continuing to reflect businesses’ positive assessments of their situation (Figure 13). In view of the continuing global production and supply chain difficulties, the magnitude of the equipment and raw materials constraint reported by companies remained significant, although there are indications of a moderation of the pressure on the supply chains (Figure 17). Total credit card purchases remained high in May. Goods exports (excluding ships, aircraft, and diamonds) remain higher than before the pandemic, and services exports remain very high (Figure 14). Goods imports are also high in all components (Figure 15).
The labor market is tight. While the unemployment rate did increase to 3.5 percent, it did so against the background of an increase in the participation and employment rates (Figure 20). The employment rate (aged 15+) increased to 61 percent—similar to the average employment rate in 2019. Alongside this, the employment rate in the prime working ages (25–64) is above the 2019 average. The number of job vacancies and the job vacancy rate stabilized in May, but remained very high. 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 leading to some wage pressures in the business sector, mainly in industries that generally feature high wages and professional employees (Figure 22). Wages in the public sector are increasing more moderately and at rates lower than the trend.
The Bank of Israel Research Department revised its staff forecast.[1] In its assessment, GDP will grow by 5 percent in 2022, and by 3.5 percent in 2023, 0.5 percentage points lower than the previous forecast for each year (Figure 12). Despite the decline in the forecast figures, the level of activity derived from the forecast remains strong. The adjusted unemployment rate among the prime working ages (25–64) is expected to be 3.5 percent at the end of 2023. The inflation rate is expected to be 4.5 percent in 2022, and to decline to 2.4 percent in 2023. In addition, the debt to GDP ratio is expected to be about 66 percent in 2022 and about 64 percent 2023.
Home prices increased by 15.4 percent in the past 12 months (Figure 9), a significantly higher pace than in previous years, but the sharp upward trend moderated slightly. There were sharp increases in building starts and building permits in the first quarter. In contrast, building completions remain low despite a slight increase in the most recent data. The volume of new mortgages taken out in May was about NIS 12 billion, representing a further increase in the pace of new mortgage borrowing (Figure 10). Alongside these, the annual increase in rents remained relatively moderate, at 3.4 percent.
In the domestic capital market there were declines in the equity indices, but they were more moderate than in global markets. Yields on long-term government bonds increased at the beginning of the reviewed period, and declined sharply at the end of the period, back to their previous environment (Figure 7). Corporate bond spreads declined, contrary to the worldwide trend. According to the Central Bureau of Statistics Business Tendency Survey, financing constraints among businesses remained relatively low in all sectors.
Globally, high inflation, monetary tightening, and the difficulties in the production chain continue to weigh upon growth in the advanced economies. Alongside the war in Ukraine and China’s policy response to the increase in COVID-19 morbidity, these have further increased global economic uncertainty. In view of this, investment houses have revised their global growth forecasts downward (Figure 24). The volume of world trade has been high in recent months, but moderated slightly in April, and based on leading indicators, it is expected to moderate further. The global purchasing managers’ index of advanced economies remained virtually unchanged in May, and continues to indicate expansion of economic activity. In contrast, the index for the emerging markets indicates moderation (Figure 25). There were significant declines in equity and commodity indices, with a high level of volatility in view of the increased uncertainty and of economic and geopolitical events around the world (Figure 33). Commodity prices showed a mixed trend. Oil prices were volatile in view of the sanctions between Europe and Russia, while the prices of metals and agricultural commodities declined (Figure 31). Government bond markets were very volatile in view of the increase in inflation and expectations of a tighter monetary policy on the part of central banks. 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, the Federal Reserve raised the federal funds rate by 75 basis points. Accordingly, the Federal Reserve’s interest rate forecast for the end of 2022 was increased sharply to 3.4 percent. In the eurozone, the European Central Bank left its interest rate unchanged, but announced that the conditions are ripe for an increase of 25 basis points in July, and for additional increases thereafter. In parallel, the ECB’s government bond purchasing program ended at the end of June, and market forecasts for the interest rate at the end of the year increased to 0.8 percent during the surveyed period. In a number of other countries where inflation is above the central bank target, there were increases in the interest rates (Figure 30).
The minutes of the monetary discussions prior to this interest rate decision will be published on July 18, 2022. The next decision regarding the interest rate will be published at 16:00 on Monday, August 22, 2022.
[1] The full staff forecast is being published separately.