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Background conditions

Inflation data: The Consumer Price Index (CPI) for June increased by 0.8 percent, compared with projections of 0.7 percent. The main factors contributing to the CPI increase were the rise in VAT, seasonal increases in clothing and footwear prices, and higher fuel and electricity prices. The CPI measured over the past 12 months was 2 percent.

Inflation and interest rate forecasts: Private forecasters’ inflation expectations for the next 12 CPI readings declined, to 1.7 percent on average, after the June CPI figure was published and removed from the forecast calculation. Inflation expectations for the coming 12 months derived from banks’ internal interest rates were stable this month at 1.6 percent, and expectations derived from the capital market were 1.5 percent. Forward expectations for terms of 2 years and longer (monthly averages) remained stable, and range from 2.2–2.5 percent. Private forecasters’ average projections are for the July CPI to increase by 0.2 percent. Expectations for the Bank of Israel interest rate 1 year from now, based on various sources, remained stable and range from 1.1–1.2 percent on average, with most forecasters projecting that the Bank of Israel will leave the interest rate unchanged for August.

Real economic activity: Indicators of economic activity which became available in the past month point to continued growth of economic activity at a rate similar to that of the past two years—against the background of a virtual standstill in demand from abroad, which was somewhat offset by growth in domestic demand. In the third estimate of first quarter National Accounts data, the growth rate was revised upward to 2.9 percent, which moderated the previous month’s concerns of an additional slowdown. Indicators of second quarter activity point to continued growth at a rate similar to that of the first quarter—consumer goods imports increased in May by 4.1 percent, the industrial production index increased by 0.3 percent in May, the Trade Revenue Index increased by 2.7 percent in April–May compared with the first quarter, and tourist entries increased by 16 percent in the second quarter compared with the first quarter. The Composite State of the Economy Index increased by 0.1 percent in June—a low rate, but higher than that recorded in the beginning of the year. The standstill continued in manufacturing exports, which are given to volatility due to the effect of several large companies on the aggregate figure. The Climate Index based on the Business Tendency Survey of the Central Bureau of Statistics indicates stability in the rate of growth. The Consumer Confidence Indices published by Globes and by Bank Hapoalim indicate a partial correction to their sharp declines in May, while the index published by the Central Bureau of Statistics continued to decline, as did the Purchasing Managers Index, which reached 46 points.

The labor market: The number of employee posts in the business sector increased in April by 0.26 percent, and offset an appreciable share of its decline of recent months. Growth in employee posts in public services continued to increase. Based on seasonally adjusted data, nominal wages increased by 0.5 percent and real wages increased by 0.2 percent in February–April, compared with November–January, continuing the trend of several months. Health tax receipts by the National Insurance Institute, which provide an indication of total wage payments in the economy, were 5.1 percent higher in May–June than in the corresponding two months of the previous year, a year over year growth rate which is similar to the previous two months.

Budget data: In January–June, the government’s cumulative deficit in domestic activity was about NIS 7.7 billion, about NIS 5.5 billion below the path consistent with the deficit ceiling for 2013 of 4.65 percent of GDP. The lower than expected deficit is primarily an expression of an expenditure level below the path. Tax receipts recovered in recent months, and were markedly higher than the seasonal path, although part of the growth represented one-time revenue and purchases brought forward ahead of the increase VAT rate in June. The changes made in the budget by the Knesset Finance Committee are not expected to impact on the deficit in 2014. However, due to the timing of some of them, a larger adjustment will be necessary in 2015.

The foreign exchange market: From the monetary policy discussion on June 23, 2013, through July 26, 2013, the shekel appreciated by about 1.4 percent against the dollar and by 0.8 percent against the euro. In terms of the nominal effective exchange rate, the shekel appreciated by about 0.9 percent during the period. The shekel’s appreciation against the dollar was in line with the global trend.

The capital and money markets: From the monetary policy discussion on June 23, 2013, through July 26, 2013, the Tel Aviv 25 Index increased by 1.4 percent. Government bond yields declined along the unindexed curve by about 15 basis points for most maturities. Along the CPI-indexed yield curve, yields declined more moderately, except for the short term, where yields increased. The yield differential between 10-year Israeli government bonds and equivalent 10-year US Treasury securities continued to contract by about 20 basis points, to 108 basis points. Makam yields declined along the entire curve by 5–10 basis points, as the one-year yield declined to 1.16 percent during the period. Israel's sovereign risk premium as measured by the five-year CDS spread declined by about 19 basis points, to 108 basis points. The Tel-Bond 60 Index increased by about 1.6 percent. At the same time, spreads in the corporate bond market continued to narrow, primarily for debt issued by companies with lower ratings.

The money supply: In the twelve months ending in June, the M1 monetary aggregate (cash held by the public and demand deposits) increased by 11.7 percent, and the M2 aggregate (M1 plus unindexed deposits of up to one year) increased by 5.8 percent.

Developments in the credit markets: The total outstanding debt of the business sector increased by 1.2 percent in May, to NIS 794 billion, as a result of the effects of the depreciation of the shekel in May and net funds raised. The private nonfinancial sector issued about NIS 2.3 billion in bonds, compared with an average of NIS 2.6 billion since the beginning of the year. Household debt increased by 0.9 percent in May, to NIS 394 billion, primarily as a result of an increase of 1.1 percent in households’ housing debt, to NIS 278.5 billion.
In June, there was about NIS 4.2 billion in new mortgages granted, similar to the average since the beginning of the year, and despite the high level in May which was attributed to new mortgages being brought forward ahead of the VAT increase. Average interest rates on new variable-rate unindexed mortgages declined in June by about 0.15 percentage points, following the decline in the Bank of Israel interest rate. The interest rate on new fixed rate CPI-indexed mortgages increased by about 0.16 percentage points.

The housing market: The housing component of the CPI (based on housing rents) increased by 0.3 percent in June, following an increase of 0.3 percent in May. In the twelve months ending in June, this component increased by 3.2 percent, compared with a 3.0 percent increase over the twelve months ending in May. Home prices, which are published in the Central Bureau of Statistics survey of home prices but are not included in the CPI, declined by 0.1 percent in April–May, and the data for previous months were revised downward. As a result, the rate of home price appreciation continued to decline, to 8.4 percent in the twelve months ending in May, compared with an increase of 8.9 percent in the twelve months to April. Following the continued decline in the share of homes purchased by investors out of total home transactions, the share increased sharply in May, from 20 percent to 24 percent.
There were 39,327 building starts in the 12 months ending in April, a slight decline compared to the pace in recent months.

The global economy: The International Monetary Fund reduced its global growth forecast at the beginning of the month from 3.3 percent to 3.1 percent for 2013, and from 4.0 percent to 3.8 percent for 2014. Projected growth of world trade was reduced by 0.5 percentage points for 2013, but was increased by 0.1 percentage points for 2014. The US economy seems to be continuing its recovery, but macroeconomic data in the US were mixed this month: nonfarm payroll employment growth continued, while the unemployment rate remained steady due to an increase in the participation rate. The housing and construction sectors continued to recover, and manufacturing activity strengthened. In contrast, there was a slowdown in activity in the services sector, and slower than expected growth in retail sales. The slowdown in Europe continues, and the unemployment rate increased slightly in May, although by less than expected. The IMF’s growth forecast for Japan for 2013 was increased by 0.5 percentage points, and investment houses assess that this reflects investors’ trust in the accommodative measures adopted there. The slowdown in the growth rates in emerging markets is becoming more severe. In China, there are increasing signs of a slowdown in growth. Growth in the second quarter was 7.5 percent in annualized terms, but viewed by composition of GDP, there was growth in the share of investments and a decline in the share of private consumption. Federal Reserve officials clarified during the month that the reduction in quantitative easing would depend on economic conditions, and the quantitative easing programs may continue or even increase if growth disappoints. This message reduced the volatility of the financial markets that had been recorded since the Fed Chairman’s speech last month. The Bank of Japan continued quantitative easing, and the ECB and the Bank of England provided forward guidance for monetary policy, which is expected to remain accommodative for a prolonged period. Monetary policy in emerging markets is not uniform, with some continuing to adopt accommodative policies, while India and Brazil adopted restrictive policies despite the slowdown, due to concerns of depreciation and inflation. The credit ratings of Italy and France were lowered this month, and political uncertainty in Portugal and Spain is making recovery in the eurozone more difficult. Energy prices increased this month, and contributed to some acceleration in inflation in emerging markets. Nonetheless, estimations regarding global inflation were lowered this month.


The main considerations behind the decision

The decision to keep the interest rate for August 2013 unchanged at 1.25 percent is consistent with the Bank of Israel's interest rate policy, which is intended to entrench the inflation rate within the price stability target of 1–3 percent a year over the next twelve months, and to support growth while maintaining financial stability. The path of the interest rate in the future depends on developments in the inflation environment, growth in Israel and in the global economy, the monetary policies of major central banks, and developments in the exchange rate of the shekel.

 


The following are the main considerations underlying the decision:

  • Inflation expectations for the coming year, based on various sources, are below the midpoint of the inflation target range. Actual inflation over the past 12 months rose to the midpoint of the target.
  • Indicators which became available in the past month point to continued growth of economic activity at the relatively moderate pace of the past two years, which eased concerns of an additional slowdown in growth.
  • The IMF revised its global growth forecast downward. The global economy continues to present a mixed picture, with apparent recovery in Japan and the UK, mixed macroeconomic data in the US, a recessionary environment continuing in Europe, and weakness persisting in emerging markets. Federal Reserve officials clarified during the month that the tapering of its quantitative easing program will depend on economic conditions. The Bank of Japan continued quantitative easing, and the ECB and the Bank of England provided forward guidance for their monetary policy, which is expected to remain accommodative for an extended period.
  • Against the background of continued expansionary monetary policies in major economies, the shekel continued to appreciate in terms of the effective exchange rate, strengthening by 0.9 percent this month.
  • In recent months, new mortgages continued to be taken out at large volumes. Home prices, which are published in the Central Bureau of Statistics survey of home prices but are not included in the CPI, declined by 0.1 percent in April–May, and previous months’ data were revised downward. With that, it is too early to determine if this represents a change in trend.


Against the background of these considerations and the interest rate reductions in recent months, the Monetary Committee decided to keep the interest rate unchanged this month.


The Bank of Israel will continue to monitor developments in the Israeli and global economies and in financial markets, particularly in light of the continuing uncertainty in the global economy. The Bank will use the tools available to it to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, and in this regard will keep a close watch on developments in the asset markets, including the housing market.

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The minutes of the discussions prior to the interest rate decision for August 2013 will be published on August 12, 2013.


The decision regarding the interest rate for September–October 2013 will be published at 17:30 on Monday, August 26, 2013.