The Monetary Committee decides on July 5, 2021 to keep the interest rate unchanged at 0.1 percent
- The rapid recovery of economic activity continues. The economy is almost completely open, and as of now, there are not material restrictions on economic activity. However, since mid-June, we have been witnessing an increase in the number of confirmed cases of COVID-19, as a result of the spread of the “Delta Variant”. At this stage, the morbidity level is low, but the spread of the disease poses some risk to the continued recovery of the economy.
- The broad unemployment rate declined to 9.5 percent, and the employment rate excluding COVID-19 absentees increased slightly. However, job vacancies as a share of total positions has stabilized at a high level.
- The Research Department’s assessment is that GDP will grow by 5.5 percent in 2021, and by 6 percent in 2022, such that the level of GDP at the end of 2022 is expected to be only about 0.5 percent lower than the level that was expected prior to the crisis.
- Home prices increased rapidly, by 5.6 percent in the past 12 months. However, the pace of rental price increases remains moderate.
- The upward trend in the pace of inflation continues. Inflation in the past 12 months has entered the target range, and is now 1.5 percent. Inflation expectations for the coming year continued to increase, and are within the target range. Inflation expectations for the medium and long terms declined slightly, but remained anchored at the midpoint of the target range.
- Since the previous interest rate decision, the shekel weakened by 1.1 percent against the US dollar, and strengthened by 0.6 percent in terms of the nominal effective exchange rate and by 2.2 percent against the euro.
- The Monetary Committee has decided to end the program providing long-term loans to the banking system against loans to be provided to small and micro businesses on October 1, 2021 or upon the utilization of NIS 40 billion in the program.
The return to normal life in Israel supports rapid growth in the coming year. However, there are still challenges to economic activity in view of the health risks in Israel and abroad and the impact to the economy, particularly the labor market. The Committee will therefore continue to conduct a very accommodative monetary policy for a prolonged time, using a range of tools as necessary, including the interest rate tool, in order to continue supporting the attainment of the policy targets and the recovery of the economy from the crisis, and to ensure the continued orderly functioning of the financial markets.
The economy is almost completely open, and other than a restriction on the entry of nonresidents to Israel and certain restrictions on Israelis traveling abroad, there are no material restrictions on economic activity as of now. As such, the rapid recovery of economic activity continues. However, from mid-June, we have seen an increase in the number of COVID-19 patients as a result of the spread of the “Delta Variant”. At this stage, the morbidity level is low, but the spread of the disease poses some risk to the continued recovery of the economy, mainly to businesses that rely on foreign tourists.
The available indicators regarding economic activity show a continuation of the recovery that began with the exit from the third lockdown, but the levels of activity, and particularly of employment, remain lower than their levels prior to the crisis. Since April, credit card expenditures have been in line with the long-term trend. The trend of recovery in consumption is reflected in the industries that were significantly hard-hit by the restrictions (Figure 3). The mobility indices to work places declined slightly, while the mobility indices to stores, vacations, and retail outlets continue to increase. In addition, total industry revenue in April increased beyond the trend that was expected prior to the crisis (Figure 5). The upward trend in services exports continued in April, and its level is higher than what it was prior to the crisis, despite the fact that tourism exports remain low. Data on goods exports indicate a slight decline in May, but have remained stable over recent months, following volatility throughout the crisis (Figure 6). Goods imports increased in May, and are at a high level (Figure 7).
Labor Force Survey data for the second half of June indicate a further slight decline in the broad unemployment rate, to 9.5 percent (Figure 9). The employment rate is in an upward trend, though at a more moderate pace than in previous months. Since the exit from the third lockdown, there has been an increase in the adjusted employment rate (according to which COVID-19 absentees are not considered employed), to 56.6 percent in May, while the rate was 61 percent in 2019, prior to the crisis. In the first half of June, there was a further small improvement in employment (Figure 11). The number of employed persons in May was about 300,000 below potential according to the trend forecast prior to the crisis. The gap from the forecast trend was the narrowest since the beginning of the crisis. The industries in which there is a reported lack of employees are the restaurants and tourism industries, which were particularly hard-hit by the crisis, and the construction industry, where the lack of workers may be due to a slowdown in demand for labor, which in turn is in line with the slowdown in the pace of building starts. The number of job vacancies continues to increase moderately, and the job vacancy rate as a share of positions has stabilized at a high level (Figure 12).
The Bank of Israel Research Department revised its macroeconomic staff forecast for the coming two years. In its assessment, GDP will grow by 5.5 percent in 2021 (Figure 1). The broad unemployment rate is expected to decline to 8 percent of the labor force at the end of 2021. In 2022, GDP is expected to grow by 6 percent, so that the level of GDP at the end of 2022 is expected to be only about 0.5 percent lower than the level that was expected prior to the crisis. The unemployment rate is expected to continue declining in 2022, and to reach about 5.5 percent by the end of the year, still higher than the precrisis level. Assuming that the State budget passes as planned and that the fiscal consolidation will be pushed off to 2023 and thereafter, the debt to GDP ratio during these years is expected to be 74 percent.
Home prices increased by 5.6 percent in the past 12 months (Figure 25), a rate that is more rapid than in previous years, with an increase in the number of home purchases and reflecting the moderating numbers of building starts and building completions. In addition, the prices of construction inputs increased. With that, the pace of rental price increases remained moderate. Mortgage volume was NIS 9.5 billion in May, further to the high mortgage volumes since the beginning of the year. (Figure 26).
The upward trend in the pace of inflation continued. The CPI for May increased by 0.4 percent, and inflation in the past 12 months entered the target range, and is now 1.5 percent (1 percent net of energy, fruits and vegetables; Figure 16). The increase in tradable goods prices continued, in view of the increase in energy prices. The prices of nontradable components also increased, particularly those that have been impacted by the removal of restrictions, such as culture, recreation and leisure (Figure 17). Inflation in Israel excluding energy and food is drawing closer to the OECD median (Figure 18). In view of the rapid recovery of economic activity, the accommodative policies around the world, and the increase in the global inflation environment, one-year inflation expectations continued to increase, and are within the target range. In particular, expectations derived from the capital market and from inflation forecasters are at the midpoint of the target range (Figure 19). Inflation expectations for the medium and long terms declined slightly, but remained anchored at the midpoint of the target range (Figure 20). The Monetary Committee is closely monitoring these developments, and it estimates that there is no concern of an outbreak of high inflation.
Since the previous interest rate decision, the shekel weakened by 1.1 percent against the US dollar, and strengthened by 0.6 percent in terms of the nominal effective exchange rate, and by 2.2 percent against the euro (Figure 21).
In the capital market, share prices and corporate bond spreads remained largely unchanged. Corporate bond spreads are similar to their precrisis levels (Figure 24). The yields on government bonds also remained stable. The credit market continues to function well with stable and low interest rates (Figures 29 and 30). According to the Central Bureau of Statistics Business Tendency Survey, credit restraints returned to their precrisis levels in all industries except the hotels industry. An examination of the financing difficulty among large and medium businesses also indicates a return to precrisis levels. Among small businesses, there was a further improvement reported in May, with a decline in the level of difficulty in obtaining bank credit, which is drawing close to the 2019 level (Figure 28).
To combat the impact of the COVID-19 crisis, the Bank of Israel implemented dedicated policy tools to support the proper functioning of the markets, strengthen the transmission of monetary policy, and increase the supply of credit to small and micro businesses. These measures included an outline for deferring loan repayments to the banking system for households and businesses, a reduction of capital requirements at the banks, a loan program to the banking system against credit to small businesses, bond purchases by the Bank of Israel, and more. With the removal of restrictions and the recovery of the economy, there is less need for the specific program to provide long-term loans to the banking system against loans to be issued to small and micro businesses, and the operation of this tool will be halted. The layer through which loans were provided to the banks at a -0.1 percent interest rate ended as planned in June, and the layer of loans at 0.1 percent interest will end on October 1 or once a total of NIS 40 billion has been utilized. The Bank of Israel is constantly examining the market conditions, and continues to use the other special tools for the crisis as necessary.
Globally, vaccinations in developed countries have reached a high rate, and morbidity is in a downward trend, which allowing the removal of restrictions on economic activity. Global growth forecasts for 2021 by the World Bank and the investment houses were revised upward (Figure 31) in view of the fiscal program approved in the US, the vaccination campaign, and the acclimation to economic activity under restrictions. The global Purchasing Managers’ Index continues to increase, indicating economic expansion, and for the first time since the outbreak of the COVID-19 crisis, the index for the services sector indicates a higher level than for the manufacturing sector. The volume of world trade continued to increase in recent months. Equity indices continue to increase, although the pace of price increases was relatively moderate. The pricing of some financial assets may not necessarily reflect all risks. There were increases in oil prices, while there were declines in the commodity indices during the recent period. The global inflation environment continues to increase, but long-term inflation expectations moderated (Figure 34). Monetary policy in the major economies remained very accommodative. The central banks left their interest rates unchanged and did not change their purchasing programs. However, in a small number of markets, mainly developing markets, where there are marked inflationary pressures, there were increases in the interest rates. The US is leading the global economic recovery, as a result of the rapid inoculation, the removal of restrictions, and a broad fiscal program. In Europe as well, sentiment data indicate an acceleration of economic activity. However, in the UK, the continued opening of the economy was delayed in view of an increase in morbidity. The recovery in China continues, but its pace slowed.
The minutes of the monetary discussions prior to this interest rate decision will be published on July 19, 2021. The next decision regarding the interest rate will be published at 16:00 on Monday, August 23, 2021.