The Monetary Committee decides on November 26, 2018 to increase the interest rate by 0.15 percentage points to 0.25 percent
- After a continued rise in inflation since the beginning of 2018, the inflation rate is stabilizing slightly above the lower bound of the target range, and is expected to remain within the target in the coming months as well. One-year expectations and forecasts from the various sources hover around the level of one percent. Medium-term expectations remained entrenched within the target range. The rise in wages in the economy and the expansionary fiscal policy will support the continued entrenchment of inflation within the target. The main risk to this is the possibility of a sharp appreciation of the shekel.
- An analysis of the data and of updated indicators of economic activity leads to the assessment that the economy is converging to its potential growth rate. In the second and third quarters, there was some slowdown in the economy’s growth rate, but current indicators of activity support the assessment that the economy is at full employment, and in particular, the tight labor market data indicate a high level of demand.
- The US economy remains robust, though the risks due to the worsening “trade war” and the heightened political risk in Europe continue to weigh on momentum. The IMF revised its growth forecast downward for most countries and regions, and the moderation in world trade continues. Emerging economies are relatively stable. The gradual normalization process of monetary policy worldwide continues, but policy remains accommodative in most economies. In financial markets, there were marked declines in most equity indices.
- Since the previous interest rate decision, the shekel weakened by 3.6 percent in terms of the nominal effective exchange rate and by 3.2 percent vis-à-vis the dollar.
- Home prices stabilized in recent months. The number of transactions and mortgage volume appear to be stabilizing, with a slight increase in mortgage interest rates.
- Even after an increase of the interest rate by 0.15 percentage points, monetary policy remains accommodative and will continue to support the attainment of policy targets. The Committee assesses that the rising path of the interest rate in the future will be gradual and cautious.
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.
Inflation is stabilizing slightly above the lower bound of the target range. After a continued rise in actual inflation since the beginning of 2018, the annual inflation rate has ranged between 1.2–1.4 percent in the past five months, and the “adjusted indices” are in a similar environment (Figure 2 in the attached data file). Inflation in tradable goods prices moderated, primarily as a result of a slowdown in the annual rate of increase in energy prices, despite the increase in oil prices until recently and the depreciation of the shekel. Inflation in prices of nontradable items, which serves as an approximation of the domestic component of inflation, resumed its rise (Figure 3). In the coming months as well, inflation is expected to remain slightly above the lower bound of the target, and 1-year expectations and forecasts from the various sources range around a level of one percent. Expectations for medium terms remained entrenched within the target range, though there has been a slight decline recently in longer-term expectations. In the intermeeting period, the shekel weakened by 3.6 percent in terms of the nominal effective exchange rate (Figure 6). The wage increases in the economy and the expansionary fiscal policy will support the entrenchment of inflation within the target range. The main risk to this is the possibility of a sharp appreciation of the shekel. The steep decline in oil prices in recent weeks may offset the factors supporting inflation, but its impact on the “adjusted indices” will be limited.
Since the previous interest rate decision, 10-year government bond yields stabilized, after increasing in previous months. In the past month, there was a slight increase in the yield spreads between corporate bonds and comparable government bonds.
Based on National Accounts data, there was some slowdown in the economy’s growth rate (Figure 11) in the second and third quarters. The growth rate in the third quarter was 2.3 percent. Private consumption grew moderately, and investment continued to contract, despite the firming of residential construction investment after it had declined over several quarters. Services (excluding start-up companies) exports returned to growth, while weakness continued in goods (excluding diamonds) exports (Figure 12). However, an analysis of the data and of updated indicators of activity—and considering the impact of volatility in vehicle imports on GDP—indicates that the economy is apparently converging to its potential growth rate. The Composite State of the Economy Index (Figure 13), the Purchasing Managers Index and the Consumer Confidence Index (Figure 14), and the Business Tendency Survey of the Central Bureau of Statistics all support this assessment, as do labor market data. The unemployment rate remains very low, though the participation and employment rates appear to be moderating from the elevated levels they had reached. The ratio of job vacancies to total employee posts rose to a record level (Figure 17), and wages continue to increase (Figure 18), led by a relatively sharp rise in the business sector, encompassing a wide range of industries and all salary levels.
Home prices have stabilized in recent months (Figure 9). The most recent data indicate that the number of transactions is apparently steadying, after some increase in the beginning of the year. New mortgage volume is stabilizing after increasing since 2017, and mortgage interest rates have increased slightly in recent months, against the background of the increase in government bond yields (Figure 10).
The macro picture conveyed by the global economy continues to indicate declining momentum. The US economy remains robust, though the risks due to a worsening of the “trade war” and heightened political risk in Europe continue to weigh on momentum. The IMF revised its growth forecast downward for most countries and regions (Figure 19), and the moderation in world trade continues (Figure 20). Global monetary policy remains accommodative, but the direction is gradually changing—while negative interest rates and below-target inflation continue in Europe and Japan, federal funds rate increases in the US are expected to continue and the central banks of several additional countries raised interest rates. Likewise, global quantitative easing wound down, and in the coming months quantitative contraction is expected to begin, in view of the Fed contracting its balance sheet and the cessation of purchases by the ECB (Figure 24). In financial markets, there were marked declines in most equity indices (Figure 25), and bond spreads widened. In the US, as noted, the high growth continued, driven by private consumption and the improvement in manufacturing activity, while the fiscal expansion’s impact is expected to dissipate in 2020. In Europe, growth weakened in the third quarter. Assessments are that it is not a change in trend, although leading indicators point to a loss of momentum. The tension between the Italian government and European authorities grew stronger, following the proposed budget that is expected to lead to an increase in the deficit in Italy. In Japan, growth was negative in the third quarter, apparently due to one-off factors, and improvement is expected in the next quarter. Emerging markets are relatively stable, but a possible worsening of the “trade war” and the effects of the monetary contraction in advanced economies continue to weigh on continued growth. Growth in China continues to weaken. There was a turnaround in oil prices, which are declining sharply (Figure 22). The growth in supply is apparently the main factor, but there are also forecasts for a decline in global demand.
The minutes of the monetary discussions prior to this interest rate decision will be published on December 10, 2018. The next decision regarding the interest rate will be published at 16:00 on Monday, January 7, 2019, following which the Governor will hold a press briefing.