The Monetary Committee decides on November 21, 2022 to increase the interest rate by 0.5 percentage points to 3.25 percent
The Monetary Committee decides on November 21, 2022
to increase the interest rate by 0.5 percentage points to 3.25 percent
- Inflation in Israel is above the upper bound of the target range, at 5.1 percent over the past 12 months. Inflation can be seen across the board in a wide range of CPI components.
- One-year inflation expectations derived from the capital market are within the target range, while one-year expectations from other sources are around the upper bound of the target range. Expectations from the capital market for the second year and onward are within the target range.
- Economic activity in Israel remains strong. The labor market remains tight, and the GDP level remains higher than the long-term trend. However, monetary policy tightening and moderation of activity abroad are expected to lead to some slowdown in economic activity in Israel as well, and a number of indicators are showing signs of the beginning of such a process.
- Home prices increased in the past 12 months by a rate significantly higher than the pace of recent years. However, the number of home purchases continues to decline, and the volume of new mortgages taken out in recent months declined significantly.
- Since the previous monetary policy decision, the shekel strengthened by 3 percent against the US dollar, and by 0.7 percent in terms of the nominal effective exchange rate. In contrast, the shekel weakened by 2.8 percent against the euro.
- Economic activity abroad is moderating, and the risk of a recession is increasing, mainly in Europe, in view of the continuing war in Ukraine and the energy crisis in Europe, high inflation and monetary tightening, and the slowdown in China. In contrast, the easing in the supply chains is continuing, with a decline in shipping costs.
The Israeli economy is recording strong economic activity, accompanied by a tight labor market and an increase in the inflation environment. The Committee has therefore decided to continue the 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.
For the file of figures accompanying this notice, click here.
Economic activity in Israel remains strong, and according to National Accounts data, GDP has been above the long-term trend line for the past four quarters (Figure 18). The labor market remains tight and in a full employment environment, although the most recent data indicate some moderation. Inflation in Israel is above the target range, and is being recorded in a wide range of CPI components. However, monetary policy tightening and moderation of activity abroad are expected to lead to some slowdown in economic activity in Israel as well, and a number of indicators are showing signs of the beginning of such a process.
Since the previous interest rate decision, the CPI increased by 0.2 percent in September and by 0.6 percent in October. Inflation in the past 12 months is above the upper bound of the target range, at 5.1 percent (Figure 1). With that, inflation in Israel remains significantly lower than in most of the advanced economies (Figure 34). Net of energy and fruits and vegetables, inflation is 5 percent, and with the further neutralization of the effects of taxation and regulation, it is 4.7 percent (Figure 2). The pace of inflation of the nontradable components increased to 4.8 percent—partly in view of the increase in the housing services component. The annual pace of inflation of the tradable components also increased, to 5.4 percent, influenced by the contribution of travel abroad by Israelis. (Figure 3). In the Committee’s assessment, the monetary tightening processes in Israel and abroad, and the moderation of demand alongside the easing of the supply chain difficulties and the decline in commodity prices, will act to moderate inflation.
One-year inflation expectations derived from the capital market are within the target range, and one-year expectations from the other sources are around the upper bound of the target range (Figure 5). Expectations for the second year and onward from the capital market are within the target range (Figure 6). Since the previous monetary policy decision, the shekel strengthened by 3 percent against the US dollar, and by 0.7 percent in terms of the nominal effective exchange rate. In contrast, the shekel weakened by 2.8 percent against the euro (Figure 7).
Economic activity is strong. National Accounts data show that in the third quarter, GDP grew by 5.8 percent compared with the third quarter last year, and by 2.1 percent in annual terms compared with the second quarter of this year (Figure 14). An analysis of the data shows that the GDP level remains higher than the precrisis trend for the fourth consecutive quarter. However, following the high growth recorded in the second quarter, the pace of growth slowed in the third quarter, with a decline in private consumption that mainly reflects a decline in the consumption of durable goods (Figure 15). Goods exports (excluding ships, aircraft, and diamonds) declined slightly in recent months, but remain higher than before the pandemic, and services exports remain very high (Figure 20). Goods imports are also high in all components (Figure 21).
The indicators of economic activity continue to point to strong activity. The aggregate balance of the Central Bureau of Statistics Business Tendency Survey for October continues to reflect businesses’ positive assessments of their situation (Figure 19). Companies in the manufacturing and construction industries continue to report an easing of the equipment and raw materials constraint, in view of the moderation of pressure in the global supply chains. However, this is also apparently due to a decline in global demand. The level of equipment and raw materials constraint remains higher than it was prior to the COVID-19 crisis (Figure 23). Alongside this, in recent months companies have been reporting an increase in the intensity of the lack of orders constraint, mainly a lack of export orders in the services and high-tech industries.
The labor market remains tight, but in recent months, particularly in October, there has been a slight moderation in employment data. The unemployment rate for those aged 15+ increased to 4.1 percent (seasonally adjusted), and has been in an upward trend since June (Figure 25). The employment rate (60.9 percent) declined slightly, and is similar to its average level in 2019, prior to the crisis. The employment rate among the prime working ages (25–64) remains high, but the most recent data show some decline (Figure 24). In parallel, the demand for workers remains high. The number of job vacancies remains historically high, but the job vacancy rate continues to decline moderately (Figure 26). According to the Central Bureau of Statistics Business Tendency Survey, there is a decline in businesses’ expectations of expanding their employee numbers, with a significant decline in the high-teach manufacturing and hotels industries (Figure 16). In parallel, the intensity of the employee hiring constraint declined in most industries in recent months (Figure 17). According to data from August, wages increased and are above the precrisis trend, but in real terms, they are around the trend projected based on the precrisis trend (Figure 27).
Home prices increased by 19.8 percent in the past 12 months (Figure 10), a significantly higher pace than in previous years. However, the number of housing transactions continues to decline, and the volume of new mortgages taken out in October declined significantly to NIS 6.1 billion (Figure 12). Rents increased by 0.5 percent in October. The annual pace of increase in the housing component of the Consumer Price Index continued to rise, to 6.2 percent in October.
In the domestic capital market there were increases in the equity indices, and yields on long-term government bonds, as well as corporate bond spreads, remained virtually unchanged, with a decline in the balance of tradable debt. The balance of business credit from banks declined slightly in October, while the interest rate continued to increase. According to the Central Bureau of Statistics Business Tendency Survey, there was some increase in the financing constraints reported by small and medium businesses since August. However, on a historical level, the financing constraint remains relatively low in all segments. (Figure 13).
Global economic activity continues to moderate, and the risk of a recession is increasing, particularly in Europe. A number of indicators continue to point to a slowdown of economic activity influenced by a number of factors. These include the continuing war in Ukraine and the energy crisis in Europe, high inflation and monetary tightening, and the slowdown in China due to the prolonged lockdowns. In contrast, the easing of the supply chain difficulties continues, with a decline in shipping costs. The investment houses revised their global growth forecasts for 2023 downward (Figure 28). The global purchasing managers’ indices of both advanced economies and emerging markets indicate a slowdown in the pace of economic activity (Figure 29). The volume of activity in world trade increased in August, but the orders for export component of the Purchasing Managers Index, which is a leading indicator of the volume of trade in the coming months, remains at a level that reflects contraction.
There were increases in the main global equity indices (Figure 37). Government bond yields remained virtually unchanged, after trading with high volatility throughout the recent period. Oil prices remained virtually unchanged. (Figure 31).
The global inflation environment remains high. However, in most countries, particularly the US, there has been marked moderation. In most countries, the inflation indices are significantly higher than the central bank targets (Figure 32), and monetary tightening around the world therefore continues. However, some central banks are slowing their pace of monetary tightening, or signaling a more moderate pace of monetary tightening in the future. In the US, the annual increase in the CPI declined to 7.7 percent in October, lower than previous forecasts. The Federal Reserve increased the federal funds rate by 75 basis points, and noted that it may slow the pace of interest rate increases at its next meeting or the one after it. However, it was emphasized that the interest rate would increase to levels higher than predicted in the September forecast.
In the eurozone, the rapid increase in inflation continues, and the overall index was at 10.6 percent in October. The ECB increased its interest rate by 75 basis points for the second consecutive time. In the UK, inflation continues to increase sharply, and reached 11.1 percent in October. The Bank of England’s monetary contraction policy continues.
The minutes of the monetary discussions prior to this interest rate decision will be published on December 5, 2022. The next decision regarding the interest rate will be published at 16:00 on Monday, January 2, 2023, and will be followed by a press briefing with the Governor.