- The inflation environment is above the lower bound of the target range, and recently it has increased slightly, with the economy being at a full employment environment. Since the beginning of the year, most CPI readings have surprised to the upside. The inflation rate over the preceding 12 months has been 1.5 percent, and it currently seems less likely that inflation will again fall below the lower bound of the target range. Most one-year inflation expectations and forecasts are slightly above the lower bound of the target range, and forward expectations for medium and longer terms remained near the midpoint of the target.
- In the past year, the shekel has strengthened by 4.3 percent in terms of the effective exchange rate. In the intermeeting period, the shekel was relatively stable vis-à-vis the dollar and the euro, and depreciated slightly in terms of the nominal effective exchange rate. If the appreciation resumes, it is expected to delay the continued increase of the inflation rate toward the midpoint of the target.
- For several quarters, the economy has grown at around the potential rate. The moderation in the growth rate of private consumption appears consistent with the exhaustion of the process of expansion in the labor market. Some indicators of second quarter growth point to moderation, but others show that growth is continuing at a solid pace. Labor market data indicate that it remains tight.
- The risks to the global economy remain significant, and the forecasts for world trade and growth in most regions were revised downward. The expectation in global financial markets is that major central banks will renew the process of monetary accommodation.
The Committee assesses that the rising path of the interest rate in the future will be gradual and cautious, in a manner that supports a process at the end of which inflation will stabilize around the midpoint of the target range, and that supports economic activity. 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, click here.
Graphs and data
The inflation environment is above the lower bound of the target range, and recently it increased slightly, with the economy being at a full employment environment. The CPI for May increased by 0.7 percent, higher than pre-publication assessments, and since the beginning of the year most CPI readings have surprised to the upside. Inflation over the past 12 months was 1.5 percent (Figure 1 in the attached file of figures), its highest level since 2013, with the volatile fruit and vegetables component making a relatively significant contribution (Figure 2). Inflation in the prices of nontradable goods, an approximation of the domestic component of inflation, moderated in recent months, but remains above the 2 percent level, and inflation in tradable goods prices continues to increase. Annual inflation is expected to decline slightly in the coming months, but most one-year inflation expectations and forecasts are slightly above the lower bound of the target range (Figure 3). The Research Department's staff forecast projects that inflation over the next four quarters will be 1.4 percent. Medium-term and long-term forward expectations remained around the midpoint of the target range. In the past year, the shekel has strengthened by 5 percent in terms of the nominal effective exchange rate. However, since the last interest rate decision, the shekel has been relatively stable against the dollar and the euro, and weakened slightly in terms of the nominal effective exchange rate (Figure 6). If the appreciation resumes, it is expected to delay the continued increase of the inflation rate toward the midpoint of the target.
Equity indices in Israel increased since the previous interest rate decision, in line with the price increases in most global markets. Government bond yields declined sharply, similar to global yields (Figure 7). Yield spreads between corporate bonds in Israel and comparable government bonds declined slightly.
For the past several quarters, the economy has been growing at near its potential rate. According to the second estimate of National Accounts data for the first quarter of 2019, which were revised downward, the economy grew by 4.8 percent, but the growth was affected markedly by volatility in vehicle imports. The moderation of the growth rate of private consumption seems consistent with the exhaustion of the expansion process in the labor market (Figure 12). Some indicators of economic activity in the second quarter point to moderation. The Composite State of the Economy Index for May increased by 0.1 percent, lower than the pace of increase in the past year. Foreign trade data indicate a continued slowdown in goods exports in May (Figure 15). In contrast, sentiment data from the Business Tendency Survey show that growth is continuing at a solid pace, and this is seen as well in (gross) tax revenues. Labor market data indicate that it remains tight—the unemployment rate continues to decline, and the latest data on the employment and participation rates show they declined slightly but remain high (Figure 16). Wage increases are continuing, led by the business sector (Figure 18). The job vacancy rate has been declining moderately for several months, but it remains high. According to the Research Department's staff forecast, GDP is expected to grow by 3.1 percent in 2019, a slightly lower pace than in the previous forecast in view of the expected impact of the slowdown in world trade on exports. In 2020, GDP is expected to grow by 3.5 percent, slightly higher than the long-term pace, as a result of expected significant activity by several large companies. The decision to hold new elections, and uncertainty regarding the measures the government will adopt following the elections in order to lower the deficit, increase the uncertainty regarding developments in the domestic economy.
In recent months, home prices again increased moderately, so that overall they increased by approximately 1.0 percent in the past year, while rental prices remained stable in the past two months. The number of transactions increased markedly among all types of homebuyers. Over the past four quarters, the downward trend in building starts appears to have halted. The trend of expansion in mortgage volume continues, and mortgage interest rates continued to decline moderately.
The risks to the global economy remain significant, mainly in view of the "trade war", political risk in Europe and in the Persian Gulf, and the concern of a slowdown in China. Forecasts of world trade and of growth for most regions were revised downward (Figure 19), the slowdown in world trade continues (Figure 20), and in contrast to the trend in recent years, the pace of growth in trade is expected to be lower than the growth rate of global output. In the financial markets, equity indices increased (Figure 25), and government bond yields declined sharply, in view of the expectation that the process of monetary accommodation by major central banks will resume. In the US, the Federal Reserve left the federal funds rate unchanged, but its announcement was interpreted as a signal that it is expected to begin implementing an accommodative policy due to intensifying risks and a decline in inflation expectations. In Europe, the economic picture continues to indicate weakness, and industrial production continues to contract. The ECB left its interest rate unchanged, but clarified that "all policy tools are on the table", and noted that there is no expectation of an interest rate increase until at least the midpoint of 2020. In Japan, there was growth in the first quarter supported by net exports, although leading indicators point to weakness in domestic demand and in the manufacturing sector. Growth in China is expected to continue to moderate, and the authorities continue to adopt measures to support growth. Oil prices declined since the previous interest rate decision, in view of the continued increase in supply from the US and despite increased geopolitical risk (Figure 23).
The minutes of the monetary discussions prior to this interest rate decision will be published on July 22, 2019. The next decision regarding the interest rate will be published at 16:00 on Wednesday, August 28, 2019.