• The inflation environment continues to rise gradually, supported by the accommodative monetary policy, and is approaching the price stability target range. Inflation over the 12 months ending in May was 0.5 percent, and inflation according to adjusted indices remains below the target. Since the last interest rate decision, there has been an increase in inflation expectations from the various sources, and they are near or slightly above the lower bound of the price stability target range.
  • Following rapid growth in the first quarter, economic growth in the second quarter is expected to stabilize at a pace that is in line with potential. Goods exports have moderated in recent months. The labor market remains tight and wages are increasing, while more companies are reporting difficulties in hiring workers.
  • Data regarding the global economy remain positive, although global growth seems to be losing momentum. In recent weeks, the risk of an intensifying trade war has again increased. Inflation in the US converged with the Fed’s target, and the Fed is continuing to raise the interest rate. In the other advanced economies, inflation is rising gradually, while monetary policy remains very accommodative.
  • The effective exchange rate remains relatively stable. Since the previous interest rate decision, there has been a depreciation of about 1 percent, following an appreciation in the weeks that preceded it.
  • Home prices have declined by 2.4 percent since peaking in August of last year, while the rise in rental prices has accelerated somewhat. Both building starts and investment in residential construction show a significant decline.

 

The Monetary Committee intends to maintain the accommodative policy as long as necessary in order to entrench the inflation environment within the target range. The Bank of Israel continues to monitor developments in inflation, the real economy, 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 data accompanying this notice, click here.

Graphs and data​

 

The inflation environment continues to rise gradually, supported by the accommodative monetary policy, and is drawing close to the price stability target range. In the 12 months ending in May, the inflation rate was 0.5 percent (Figure 1 in the attached data file), and inflation indices that exclude transitory effects are higher, though still below the target (Figure 2). Annual inflation is expected to increase once the June 2017 inflation figure, which was particularly low, exits the 12-month calculation. Inflation in the prices of tradable goods remains negative, but is on an upward trend, impacted by the rise in energy prices and depreciation of the shekel against the dollar. Inflation in the prices of nontradable items resumed its increase in the past two months, led by the housing component (Figure 3). Since the previous interest rate decision, there has been an increase in one-year inflation expectations from various sources (Figure 4). Forward expectations for inflation beginning from the second year also increased, and longer-term expectations remain anchored within the target range (Figure 5). According to the Research Department’s staff forecast, inflation in the next four quarters is expected to be 1.4 percent. The effective exchange rate remains relatively stable. Since the previous interest rate decision there has been a depreciation of about 1 percent, following an appreciation in the weeks preceding it (Figure 6).

 

Since the previous interest rate decision, yields on government bonds in Israel have increased, in contrast with declines in the other advanced economies, and therefore the spread between the nominal yield on 10-year US Treasury securities and the yield on similar Israel government bonds narrowed (Figure 7). The real-yield spreads between corporate and government bonds continued to widen, but are still at a low level (Figure 8).

 

The second estimate of National Accounts data also shows that in the first quarter of 2018, economic activity continued to expand at a solid pace (Figure 11) and even slightly above potential, reflecting in part the large increase in vehicle imports in the first quarter that had a prominent effect. In contrast, the growth rates of exports and of investments were revised downward. Indicators of economic activity show some slowing of the growth rate. According to the initial data from the Companies Survey, the growth rate in the second quarter was in line with the potential rate (Figure 12); the Composite State of the Economy Index for May increased by 0.25 percent—slightly lower than the rate of increase in previous months; and the Purchasing Managers Index published by Bank Hapoalim declined in May and is slightly below the boundary that distinguishes between expansion and contraction. Goods exports have moderated in recent months (Figure 14). The labor market remains tight, with the unemployment rate still very low and the participation and employment rates remaining high (Figure 15). Wages continue to increase at a high rate (Figure 16), while there is strong demand for workers and companies are reporting constraints in hiring new workers. The increase in wages is reflected in the continued increase of unit labor cost. According to the Research Department’s staff forecast, GDP is expected to grow at a rate of 3.7 percent in 2018 and 3.5 percent in 2019.

 

Home prices stabilized in the most recent two months for which data have been published (February and March), after having declined by 2.4 percent from the peak reached in August (Figure 9). In contrast, the annual rate of increase in rental prices (in new and renewing contracts) continued to rise in May, to 2.9 percent. There is a significant slowing of the number of building starts and of investment in residential construction. New mortgage volume continued to increase, and mortgage interest rates remained stable after declining in 2017 (Figure 10).

 

Global economic data remain positive, although it seems that the growth is losing strength. International investment houses revised their growth forecasts for the major economies slightly downward (Figure 18), the growth rate of world trade slowed in recent months (Figure 19), and the decline in the global purchasing managers index signals a weakening of momentum. In recent weeks the risk of an intensifying trade war has again increased, and political tensions in Europe have increased. Equity market prices in advanced economies remained stable, in contrast with declines in the emerging markets (Figure 23). Inflation in the US continues to converge with the Fed’s target, while in the other advanced economies it remains moderate but is increasing gradually (Figure 20). The US economy is close to full employment with a gradual increase in wages. At this point, second quarter growth seems high. The Federal Reserve is continuing with its path of raising the interest rate. It increased the federal funds rate this month, and is expected to increase it twice more in 2018. In Europe, following moderate growth in the first quarter, macroeconomic data for the second quarter also indicate moderate growth. The ECB announced a plan to halt bond purchases at the end of 2018, though the text of its announcement has led to expectations that an interest rate increase would not take place before the fall of 2019. Monetary policy in Japan remains very accommodative. Financial risk in the emerging economies increased, as reflected by negative sentiment in the capital markets, capital outflows, and the weakening of currencies due to the increased yields in the US. Crude oil prices continued to increase, and there was a decline in commodity prices (Figure 21).

 

 

The minutes of the monetary discussions prior to this interest rate decision will be published on July 23, 2018.

The next decision regarding the interest rate will be published at 16:00 on Wednesday, August 29, 2018.

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