- The inflation environment remains low. Inflation in the past 12 months was 0.6 percent while inflation excluding energy and fruit and vegetables has been stable in the range of 0.9–1.1 percent since the beginning of the year. Most of the negative contribution to the CPI in recent months came from the components that are traditionally volatile, but also from the cumulative appreciation of the shekel since the beginning of the year. Annual inflation is expected to decline in the coming months, and to return to near the lower bound of the target range within a year. Long-term expectations are anchored near the midpoint of the target range.
- Since the previous interest rate decision, the shekel has strengthened by 1.2 percent in terms of the nominal effective exchange rate, and by 9.1 percent since the beginning of the year. The appreciation is making it more difficult to return inflation to the target range.
- The risks to the global economy have increased, mainly due to the "trade war" and uncertainty regarding Brexit. Growth forecasts were revised downward, and the major central banks adopted monetary accommodation measures.
- Economic activity continues to grow at near its potential rate, and so far it seems that it is not being adversely affected by the negative global sentiment or by the political situation in Israel. However, uncertainty regarding the measures that the government will take to reduce the deficit increases the uncertainty regarding developments in the domestic economy. Most of the indicators show that in the third quarter, the economy continued to grow at near the potential rate. Exports are increasing solidly, but the Business Tendency Survey indicates some increase in the rate of companies reporting serious constraints in export profitability, following a decline in this rate during 2018. The labor market remains tight.
The Monetary Committee's assessment is that in view of the inflation environment in Israel, the monetary policies of major central banks, the slowing in the global economy, and the continued appreciation of the shekel, it will be necessary to leave the interest rate at its current level for a prolonged period, or to reduce it in order to support a process at the end of which inflation will stabilize around the midpoint of the target range, and so that the economy will continue to grow strongly. Moreover, if necessary, the Committee will take additional steps to make monetary policy even more accommodative. The Bank of Israel continues to monitor developments in inflation, the real economy, fiscal policy, the financial markets, and the global economy, and will act to attain the monetary policy targets in accordance with such developments.
For the file of figures accompanying this notice, click here.
The inflation environment remains low. After about a year in which it hovered in the lower portion of the target range, annual inflation has, for the past three months, been below the target. The CPI reading for August increased by 0.2 percent, slightly above expectations, after the readings for June and July were markedly lower than expected. Inflation in the past 12 months was 0.6 percent (Figure 1 in the attached file of figures), while inflation excluding energy and fruit and vegetables has been stable in the range of 0.9–1.1 percent since the beginning of the year (Figure 2). Most of the negative contribution to the CPI in recent months came from the components that are traditionally volatile: the fruit and vegetables component, the effect of which is felt in the inflation of nontradable goods prices, and the travel abroad and vehicle maintenance components, which were apparently impacted by the cumulative appreciation of the shekel since the beginning of the year and the decline in energy prices, and led to a continued decline in the prices of tradable goods. In view of the decline in inflation and the appreciation of the shekel, short-term inflation expectations also declined, and one-year expectations are around the lower bound of the target range (Figure 4). The Research Department's staff forecast indicates that inflation in 2020 is expected to be 1.2 percent, 0.4 percentage points lower than the previous forecast. In the capital markets, there was an increase in forward expectations up to three years, and long-term expectations are anchored near the midpoint of the target range. (Figure 5). The shekel has strengthened by 1.2 percent in terms of the nominal effective exchange rate since the previous interest rate decision, and by 9.1 percent since the beginning of the year (Figure 6). The appreciation is making it more difficult to return inflation to the target range.
Economic activity continues to grow at near its potential rate (Figure 11), and so far it seems that activity in Israel is not being adversely affected by the negative global sentiment or by the political situation in Israel. However, uncertainty regarding the measures to be taken by the government to reduce the deficit increases the risk regarding developments in the domestic economy. Most indicators, such as the Composite State of the Economy Index (Figure 12), the sentiment index calculated from the Business Tendency Survey, initial data from the Companies Survey (Figure 13), and the Consumer Confidence Index, show that the economy continued to grow in the third quarter at near its potential rate. In contrast, the Purchasing Managers Index declined significantly in August, and indicates a contraction of activity. The most recent data on goods exports were relatively good, in view of improved exports of electronic components, and the trend of growth in services exports continues. However, the Business Tendency Survey shows some increase in the rate of companies reporting serious constraints in export profitability, following a decline in this rate during 2018 (Figure 15). The labor market remains tight—the latest data on the employment, participation, and unemployment rates show they increased slightly, and wage increases are continuing, led by the business sector, although the rate of increase has slowed somewhat. The job vacancy rate has been declining moderately for several months, but remains high. A breakdown of the unemployed by how long they have been waiting to return to employment, and the decline in the number of people who are involuntarily employed part-time also indicate a tight labor market. According to the Research Department's staff forecast, GDP is expected to grow by 3.1 percent in 2019, similar to the previous forecast. GDP growth in 2020 is expected to be 3.0 percent, similar to the long-term rate. Growth in 2020 is expected to be about 0.5 percentage points lower than in the previous forecast, as a result of the decline in export forecasts due to the expected slowdown in world trade, and due to the assumption that the government will need to take certain measures to lower the deficit.
Equity indices in Israel increased since the previous interest rate decision, in parallel to global markets. Medium- and long-term government bond yields increased following the previous interest rate decision, but then declined again, similar to developments in US yields (Figure 7). Yield spreads between corporate bonds of the nonfinancial business sector in Israel and comparable government bonds continued the downward trend that began at the start of the year.
In recent months, home prices increased moderately: The increase in the past year is approximately 0.7 percent, while the rate of increase in rents remained stable around 2.5 percent. The number of purchases among all purchaser types grew, led by first home buyers. Mortgage volume continued to expand, as a result of a combination of an increase in the number of transactions and an increase in the average mortgage level, and mortgage interest rates continued to decline.
The risks to the global economy have increased, mainly in view of the "trade war" and uncertainty regarding Brexit. The OECD revised its 2019 and 2020 global growth and world trade forecasts downward (Figure 20). The deterioration in world trade worsened (Figure 21). In the financial markets, equity price increased (Figure 26), in view of the deepening monetary accommodation in various markets (Figure 25). In the US, the Federal Reserve again lowered the federal funds rate by 0.25 percentage points, and assessments in the markets are that the interest rate may continue to decline this year. Inflation increased slightly, but remains slightly below the target, and third quarter growth is expected to be moderate, in addition to the slowdown that was recorded in the second quarter. In Europe, there was a slowdown in growth, and industrial production continues to contract, weighing particularly on the manufacturing-intensive German economy. Inflation in the eurozone remained low, and the ECB lowered its interest rate, as expected, by 0.1 percentage points, and adopted additional significant accommodative measures. In Japan, second quarter growth declined in view of the weakness of exports and investments. Growth in China continued to moderate, and the ramifications of the trade war and the slowdown in the growth rate led the regime to continue its monetary accommodation measures. In mid-September, oil prices increased sharply following the attack on the Saudi oil installations, but then declined back to its third-quarter environment (Figure 24).
The minutes of the monetary discussions prior to this interest rate decision will be published on October 22, 2019. The next decision regarding the interest rate will be published at 16:00 on Monday, November 25, 2019.