The Monetary Committee decides on May 23, 2022 to increase the interest rate to 0.75 percent
- Economic activity in Israel is continuing at a high level. Indicators of economic activity continue to show levels close to potential, and the pandemic’s effect on the economy has declined significantly. However, the war in Ukraine and the lockdowns in China are increasing inflationary pressure, and leading to a slowdown in the pace of global economic activity.
- Inflation in Israel is exceeding the upper bound of the target range, at 4 percent over the past 12 months. With that, it remains significantly lower than in most advanced economies.
- One-year inflation expectations are around the upper bound of the target range. Longer-term expectations remain anchored within the target range.
- Since the previous monetary policy decision, the shekel has weakened by 4.6 percent against the US dollar, by 1.4 percent against the euro, and by 3 percent in terms of the nominal effective exchange rate.
- Economic data continue to indicate strong activity, even though first quarter GDP contracted by 1.6 percent in annual terms relative to the fourth quarter of 2021. This followed a 15.6 percent jump in the previous quarter.
- The labor market remains tight and close to the full employment that characterized the economy prior to the COVID-19 pandemic. Businesses in most industries continue to indicate a shortage of workers as a constraint on their current operations.
- The upward trend in home prices continued to accelerate, with prices rising by 16.3 percent in the past 12 months.
The Israeli economy is recording strong growth, accompanied by a tight labor market and a continued increase in the inflation environment. The Committee has therefore decided to continue the gradual 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 is continuing at a high level, and the risk to the domestic economy from the continuing morbidity cycles seems to be fading, at least in the short term. With that, there is concern that global developments, particularly the war in Ukraine and the slowdown in activity in China as a result of the lockdowns, may have some negative impact on economic activity.
Since the previous interest rate decision, the CPI increased by 0.6 percent in March and 0.8 percent in April. Inflation in Israel is above the upper bound of the target range, and was 4 percent in the past 12 months (Figure 1). However, it remains significantly lower than in most advanced economies (Figure 27). Net of energy and fruits and vegetables, inflation is 3.4 percent, and with the further neutralization of the effects of taxation and regulation, it is 3.1 percent (Figure 2). All of the primary components of the Index contributed to the increase in inflation in the past year, and 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 around the upper bound of the target range (Figure 4). Since the previous policy decision, expectations derived from the capital market for all ranges declined slightly. Longer-term expectations remain anchored within the target range (Figure 5). Since the previous monetary policy decision, the shekel has weakened by 4.6 percent against the US dollar, by 1.4 percent against the euro, and by 3 percent in terms of the nominal effective exchange rate (Figure 6).
Indicators of economic activity continue to show levels close to potential, and the pandemic’s effect on the economy has declined significantly. According to the first estimate of National Accounts data for the first quarter of 2022, GDP contracted by 1.6 percent in annual terms relative to the fourth quarter of 2021, following a 15.6 percent jump in the fourth quarter (Figure 11). The decline in GDP in the first quarter was mainly influenced by declines in services exports (excluding the sale of startup companies), public consumption, and investments in the principal industries (Figure 12). However, a comparison of first quarter data from 2022 with first quarter data from 2021 indicates growth of about 9 percent. The level of GDP remains around the prepandemic trend line.
The aggregate balance of the Central Bureau of Statistics Business Tendency Survey for April increased, 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 continued to increase, with a prominent increase in the manufacturing and construction industries. Total credit card purchases remained high, with a marked recovery in the tourism, leisure, transportation, and restaurant industries. Direct and indirect tax receipts continued to increase rapidly. Goods exports (excluding ships, aircraft, and diamonds) remain higher than before the pandemic, and services exports remain high (Figure 15). Goods imports are also high in all components (Figure 16).
The labor market remains tight and close to the full employment that characterized the economy prior to the pandemic. In April, the adjusted employment rate (aged 15+) declined slightly, to 60.1 percent—slightly lower than the average employment rate in 2019 (61.1 percent). The gap is equal to about 70,000 employees (Figure 22). While the narrow unemployment rate declined in April to a low of 3.1 percent from its March average of 3.4 percent (Figure 18), the decline was due to a decline in labor force participation and not an increase in employment. The number of job vacancies continued to increase in April, and remains high. Businesses in most industries continue to indicate a shortage of workers as a constraint on their current operations. So far, the overall pace of wage increases according to the composition-adjusted index is close to its prepandemic trend (Figure 20). However, wages in the business sector are slightly higher than the path that corresponds to the prepandemic trend, while wages in the public sector are increasing more moderately.
The upward trend in home prices continued to accelerate, with prices rising by 16.3 percent in the past 12 months (Figure 9), a significantly higher pace than in previous years. The volume of new mortgages taken out in April was lower than in March, at NIS 10.5 billion. However, after adjusting for seasonal factors in April, there was no significant change in the high pace of new mortgages (Figure 10). Alongside this, the annual increase in rents (in renewing contracts) was 3.2 percent.
In the domestic capital market there were declines in the equity indices and government bond yields increased significantly, similar to the global trend (Figure 7). Corporate bond spreads continued to increase, but remained at low levels by historical perspective. According to the Central Bureau of Statistics Business Tendency Survey, financing constraints among businesses remained relatively low )Figure 17).
Globally, the war in Ukraine and its effects, as well as the slowdown in economic activity in China due to the increase in COVID-19 morbidity there and policy’s response to it, are extending the interruptions in the global production chain, despite some decline in shipping prices. This is prolonging the energy crisis, increasing inflationary pressures, and leading to a slowdown in the pace of global economic activity. In view of this, investment houses have revised their global growth forecasts downward (Figure 23). The global purchasing managers’ index declined slightly in April, mainly influenced by moderation originating in China, while the indices in the rest of the world continue to indicate expansion of economic expansion (Figure 24). There were sharp declines in the equity indices, with high volatility (Figure 31). Commodity markets were also volatile, with price increases in oil and agricultural commodities due to the war in Ukraine and the export restrictions imposed in India. In the bond markets, the increases in yields on government bonds continued, with a high level of volatility, in view of the increase in the inflation environment and uncertainty regarding the future inflation and interest rate paths. Corporate bond spreads continue to widen. 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 50 basis points, and announced a shrinking of its balance sheet (QT). In the eurozone, the European Central Bank left its interest rate unchanged, confirmed its intention to end its government bond purchasing program in the coming months, and signaled an increase in its interest rate later on. In a number of other countries where inflation is above the central bank target, there were increases in the interest rates (Figure 28).
The minutes of the monetary discussions prior to this interest rate decision will be published on June 6, 2022. The next decision regarding the interest rate will be published at 16:00 on Monday, July 4, 2022, followed by a press briefing with the Governor.