The Monetary Committee decides on May 28, 2018 to keep the interest rate unchanged at 0.1 percent
- The inflation environment continues to rise, supported by the accommodative monetary policy, but remains below the target. One-year expectations and forecasts are slightly below the lower bound of the target range, and inflation expectations for two years and longer are within the target.
- In the first quarter as well, the economy grew at a solid pace and in a balanced manner. Services exports continued to grow at a rapid rate and growth in goods exports continued. The labor market remains tight. After some slowing, business sector wages resumed rising, at a more rapid rate.
- Data regarding the global economy remain positive, though the picture now is less even. In recent weeks, the risk of a trade war breaking out declined, but geopolitical risks continue, and the financial risk in emerging markets increased. In the US, the normalization of monetary policy is expected to continue, while in Europe, Japan, and the UK inflation is weakening and the withdrawal from monetary accommodation will likely be deferred.
- In the past year, the nominal effective exchange rate has been relatively stable. Since the previous interest rate decision, there has been an appreciation of 1.4 percent in terms of the nominal effective exchange rate.
- In the past 6 months, home prices declined by 2.7 percent. The number of transactions by buyers upgrading their homes continues to decline, but the most recent data indicate an increase in transactions by first home buyers. The decline in residential construction investment continues.
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.
The inflation environment continues to rise, supported by the accommodative monetary policy, but remains below the target. In the 12 months ending in April, the inflation rate was 0.4 percent (Figure 1 in the attached data file), and inflation measured by indices that exclude transitory effects is higher, though still below the target (Figure 2). The inflation rate of tradable goods prices continued to increase, impacted by the rise in energy prices and stabilization of the exchange rate, and is near zero. Inflation in nontradable items is relatively low (Figure 3). Since the previous interest rate decision, there has been an increase in inflation expectations from various sources—the 1-year inflation expectations and forecasts are still below the lower bound of the target range (Figure 4), though forward expectations for inflation beginning from the second year are within the range, and longer-term expectations are anchored around the midpoint of the target range (Figure 5). The effective exchange rate remains relatively stable. Since the previous interest rate decision there has been an appreciation of 1.4 percent, after a depreciation in the weeks preceding it (Figure 6).
Since the previous interest rate decision, yields on government bonds in Israel and abroad have increased, and the spread between the nominal yield on 10-year Israeli government bonds and the yield on similar US Treasury securities was stable (Figure 7). The real-yield spreads between corporate and government bonds have widened since the beginning of the year but are still at a low level (Figure 8).
Economic activity continued to expand at a solid pace in the first quarter of 2018, and the growth remains balanced—based on the first estimate of National Accounts data (Figure 11), GDP grew by 4.2 percent (seasonally adjusted, in annual terms) and all the main uses increased, except for residential investment. Exports continued to grow. Services exports are growing rapidly but there was also growth of goods exports (Figure 13), impacted by opposing factors: a sharp decline in exports of pharmaceuticals and a steep increase in exports of electronic components. Durable goods purchases increased at a rapid pace against the background of elevated imports of vehicles, but there was also solid growth of current private consumption, public consumption (excluding defense imports), and nonconstruction investment. The labor market remains tight, with the unemployment rate still low and the participation and employment rates remaining high (Figure 14). After some slowdown in the preceding months, wages in the business sector resumed rising at a more rapid rate (Figure 15), against the background of an increase in the minimum wage and the strong demand for workers, reflected as well in the prolonged decline in the ratio of jobseekers to the number of job vacancies in most occupations (Figure 16).
Since the decline in home prices began, they have declined by 2.7 percent (in the past six months for which data was published) (Figure 9). The number of transactions by homeowners upgrading their homes continues to decline, but the most recent data indicate an increase in transactions by first home buyers. New mortgage volume continues to increase and mortgage interest rates are stabilizing after declining in 2017 (Figure 10). The decline in residential construction investment continues.
Global economic data remain positive, though after several quarters in which growth encompassed most economies, the current picture is less even. The IMF revised upward its growth forecast for major economies (Figure 17), and world trade continued to expand (Figure 18). In recent weeks the risk of a trade war breaking out has declined, and it appears that the sides are attempting to reach agreements. In contrast, geopolitical tension has increased. Equity market prices in advanced economies rose slightly, against the background of positive financial reports by US companies (Figure 19). Most major central banks continued to adopt accommodative monetary policy. Inflation in the US ranged near its target, while in Europe, Japan, and the UK it continued to weaken (Figure 20)—a development that is likely to defer steps to begin withdrawing from the monetary accommodation. The US economy is close to full employment and continued to grow at a solid pace in the first quarter. Leading indicators point to the positive momentum continuing in the second quarter. The Federal Reserve left the federal funds rate unchanged in its most recent decision, but is expected to increase the rate twice more in 2018. In Europe, moderate growth continued. The ECB left its accommodative monetary policy in place. In Japan, activity contracted in the first quarter, after eight quarters of expansion. Financial risk increased in emerging economies against the background of capital outflows that derived from the increased yields in the US and the strengthening of the dollar. Crude oil prices increased rapidly (Figure 22).
The minutes of the monetary discussions prior to this interest rate decision will be published on June 11, 2018.
The next decision regarding the interest rate will be published at 16:00 on Monday, July 9, 2018, followed by a press briefing with the Governor.