The Monetary Committee decides on May 31, 2021 to keep the interest rate unchanged at 0.1 percent
- The rapid recovery of economic activity continues as the COVID-19 pandemic subsides in Israel. The deterioration in the security situation that lasted approximately 10 days apparently had only a limited negative impact. The significant increase in consumption continued even in the industries that were particularly hard hit by the restrictions during the COVID-19 crisis.
- The broad unemployment rate declined to 9.6 percent, and since the exit from the third lockdown in February, the modified employment rate has increased. Alongside this, some of the data indicate difficulties in the labor market’s recovery process: the number of job vacancies continues to rise, alongside an increase in employers’ difficulty in recruiting new workers in some industries.
- According to the first estimate of National Accounts data for the first quarter, GDP contracted by an annual rate of 6.5 percent, but first quarter data reflect a complex picture. In the first half of the quarter, the economy was under lockdown in view of peak morbidity rates from the pandemic, while the end of February and March featured a rapid exit from the crisis and recovery of the economy. First quarter GDP data were significantly impacted by vehicle imports that had been brought forward to the end of 2020 because of changes in tax rates, and by the shift of the timing of government expenditures on public consumption. Overall, the composition of uses shows a positive picture of the state of the economy.
- Home prices increased by a relatively rapid rate of 4.5 percent in the past 12 months. Investors’ share of total home purchase transactions increased. However, the rate of increase of rental prices remained moderate.
- The inflation environment remains low, but is in an upward trend. The CPI increased by 0.3 percent in April, and inflation in the past 12 months is 0.8 percent. According to assessments, the inflation rate is expected to reach the target range following the publication of the CPI reading for May. Inflation expectations for the coming year from all sources continued to increase, and are within the inflation target range. Medium- and long-term inflation expectations also increased, and are anchored at the midpoint of the target range.
- Since the previous interest rate decision, the shekel strengthened by 0.4 percent against the US dollar, and weakened by 0.5 percent in terms of the nominal effective exchange rate and by 1 percent against the euro. The deterioration in the security situation led to a short-lived increase in volatility.
- The vaccination campaign around the world is accelerating and supporting economic activity, but at the same time, there has been a worsening of morbidity in a number of emerging economies. Investment houses’ growth forecasts for most of the major economies were revised upward. The prices of agricultural commodities, metals, and oil increased, and contributed to the continued increase in inflation. Monetary policy at the major central banks remains very accommodative.
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 rapid recovery of economic activity continues as the COVID-19 pandemic subsides in Israel. However, there remains concern over the development of mutations that are resistant to the vaccinations or that would lead to more serious morbidity among the unvaccinated population, which constitutes a risk to the economy and to maintaining the almost full routine that the economy enters at the beginning of June. The deterioration in the security situation that lasted about 10 days apparently had only a limited impact on the economic recovery process. The duration of the hostilities was relatively short, and as a result of the COVID-19 crisis, large parts of the economy have acclimated to remote work and consumption. In addition, a significant portion of the economic impact during similar incidents in the past was to tourism services exports, while such exports were already low due to the COVID-19 crisis.
The available indicators regarding economic activity show a continued trend of improvement. The level of consumption through credit card transactions returned to, and even crossed, the trend line that was expected prior to the crisis (Figure 4). During the conflict, there was a transitory decline in credit card expenditures, but these expenditures recovered rapidly. The significant increase in consumption continued even in the industries that were particularly hard hit by the restrictions during the COVID-19 crisis (restaurants, tourism, leisure services, and education). Alongside the growth in domestic consumption, the increase in internal tourism is still not sufficient to compensate for the absence of incoming tourism. The hotels industry is still suffering from the significant adverse impact. Prior to the confrontation, the indices of mobility to stores increased to the highest level since the start of the pandemic. Mobility to work places has not yet returned to its precrisis level, both because employment has not yet completely recovered, and also due to the adoption of remote work arrangements at many workplaces (Figure 5). The Central Bureau of Statistics (CBS) Consumer Confidence Index increased sharply prior to the conflict, mainly due to the sharp improvement in the components of expectations of the state of the economy in the coming year. According to the CBS Business Tendency Survey for April, the aggregate net balance of the business sector continues its upward trend (Figure 3). In addition, according to the CBS's most recent real-time survey, the adverse impact on business revenue in March was the lowest since the start of the crisis.
Labor Force Survey data for the first half of May indicate a decline in the broad unemployment rate to 9.6 percent (Figure 8). Since the exit from the third lockdown in February, there has been an increase in the modified employment rate (according to which those absent due to COVID-19-related reasons are not considered employed), and according to data from the first half of May, the rate is 57 percent. (The rate was about 61 percent in 2019.) (Figure 9). Alongside this, some of the data indicate difficulties in the labor market’s recovery process. The number of job vacancies continues to climb (Figure 10), and employers’ difficulties in recruiting workers has also increased. According to the Business Tendency Survey, there was a significant increase in the rate of manufacturing companies reporting difficulty in recruiting nonprofessional workers, to about 20 percent (Figure 11). Alongside this, it is possible that some of the difficulties are temporary due to the sharp and rapid exit from COVID-19-related restrictions to a full activity routine.
According to the first estimate of National Accounts data for the first quarter, GDP contracted by an annual rate of 6.5 percent (Figure 1). The decline in that quarter was significantly impacted by vehicle purchases being brought forward to the end of 2020 because of tax changes, and by the shift of the timing of government expenditures on public consumption. According to a Research Department estimate, the contraction in GDP net of the decline in vehicle imports was only 3.2 percent. First quarter data reflect a complex picture. In the first half of the quarter, the economy was under lockdown in view of peak morbidity rates from the pandemic, while the end of February and March featured a sharp exit from the crisis and recovery of the economy. An examination of the components of uses shows a positive picture of the state of the economy. Private consumption excluding durable goods, investments in machinery and equipment, and exports all increased strongly (Figure 2).
Services exports remained unchanged in recent months, but there is still an apparent continued upward trend, and its level is higher than it was prior to the crisis, despite the fact that tourism exports remain low. Data on goods exports increased slightly in April and are remaining stable, following volatility during the crisis (Figure 6). Data on goods imports stabilized in April but remained high (Figure 7). As a result of the continuing ramifications of the COVID-19 crisis, there is a lack of equipment and raw materials, which is leading to difficulties in global economic activity. According to the Business Tendency Survey, this difficulty is having a particular impact on activity in the manufacturing and construction industries in Israel. The increase in orders for consumer goods and imports of goods for manufacturing, combined with the lack of manpower and storage space at the ports, are leading to difficulties in supply chains.
Home prices increased by a relatively rapid rate of 4.5 percent in the past 12 months (Figure 22), in view of the moderation in the pace of building starts and building completions. In addition, there was an increase in construction input prices. Investors’ share of total home purchase transactions increased. At the same time, the pace of increase in rental prices remained moderate. New mortgage volume in April 2021 was NIS 8.3 billion, further to the high mortgage volumes since the beginning of the year (Figure 23).
The inflation environment remains low but the upward trend in the inflation rate continues. The CPI for April increased by 0.3 percent. Inflation in the past 12 months was 0.8 percent (0.5 percent net of energy and fruit and vegetables) (Figure 14), and according to assessments, it is expected to reach the target range following the publication of the May CPI reading. The prices of tradable goods increased sharply, in view of the increase in energy prices, while the rate of change in the prices of nontradable components of the CPI remained moderate (Figure 15). Inflation expectations increased against the background of the rapid recovery in economic activity and the accommodative policy, the increases in the prices of raw materials, the increase in maritime shipping costs, and the increase in the global inflation environment. Inflation expectations for the coming year from all sources continued to increase, and are within the target range. In particular, expectations derived from the capital market and from inflation contracts are near the midpoint of the range (Figure 16). Medium- and long-term expectations also increased, and are anchored at the midpoint of the target range (Figure 17).
Since the previous interest rate decision, the shekel strengthened by 0.4 percent against the US dollar, and weakened by 0.5 percent in terms of the nominal effective exchange rate and by 1 percent and against the euro (Figure 18). The security escalation led to only a short-lived increase in volatility.
In the capital markets, the upward trend in equity prices continues and corporate bond spreads remained unchanged at a level close to their precrisis level (Figure 21). The yields on CPI-indexed government bonds declined, while the yields on nominal bonds increased. The credit market continues to function well with stable and low interest rates, supported by a range of steps taken by the Bank of Israel and the Ministry of Finance (Figures 24–25). According to the Business Tendency Survey, in March and April, there was a mixed trend in firms’ difficulty in obtaining credit. There was an increase in the difficulty in obtaining credit among small businesses, while large businesses reported a decline in this difficulty. There was stability among all company sizes in obtaining nonbank credit. From an industry standpoint, the average level of difficulty in obtaining credit returned to its precrisis level in all industries except hotels, where there was a sharp decline in the difficulty in March, but companies are still reporting relatively high levels of difficulty in obtaining credit.
Globally, the pace of vaccinations is accelerating and supporting economic activity. However, there was a worsening of morbidity in a number of emerging economies. Investment houses’ growth forecasts for most of the major economies were revised upward (Figure 26). The consolidated global Purchasing Managers Index for April increased to its highest level in the past decade (Figure 28), and the expansion of activity was reflected in both the services and manufacturing components. The major equity indices were characterized by a mixed trend during the period, but remain at record high levels (Figure 38). The pricing of some financial assets may not necessarily reflect all of the risks. The prices of agricultural commodities, metals, and oil increased, in view of the supply limitations and increased demand, and contributed to the continued increase in inflation, but inflation expectations remained near the central bank targets. Monetary policies at the major central banks remained very accommodative. In contrast, the interest rate increases in the emerging economies continue in view of the increase in inflation. In the US, the rapid economic growth continues and the sentiment indices point to continued rapid improvement in activity. Despite this, the employment report indicated a slowdown in the pace of job additions. In Europe, economic activity contracted in the first quarter of the year, but the acceleration in the pace of vaccinations in the population, alongside the decline in morbidity and expectations of the launch of a fiscal program in the second half of the year led to improved sentiment indices and an upward revision of the growth forecasts. The Chinese economy continues to expand, but the expansion has slowed to close to its precrisis pace.
The minutes of the monetary discussions prior to this interest rate decision will be published on June 14, 2021. The next decision regarding the interest rate will be published at 16:00 on Monday, July 5, 2021, followed by a press briefing by the Governor.