Background conditions
Inflation data: The Consumer Price Index for January declined by 0.5 percent, a slightly more moderate rate than the average of forecasters’ predictions for a decline of 0.6 percent. There were seasonal price declines in the clothing and footwear component (-5.7 percent), and the housing component (-0.5 percent), and there was a marked decline (-0.7 percent) in the transport and communication component, against the background of the decline in fuel prices. Inflation over the past 12 months was negative 0.6 percent, compared with negative 1 percent in the 12 months ending in December. Excluding energy prices and administrative price reductions, inflation over the past 12 months was 0.7 percent. Prices of components representing tradable goods in the CPI declined by 2.8 percent over the past 12 months, and the prices of components representing nontradable items increased by 0.7 percent.
Inflation and interest rate forecasts: One-year inflation expectations derived from the capital market are negative 0.2 percent (similar to the previous month), and expectations derived from banks’ internal interest rates are negative 0.4 percent (compared with negative 0.3 percent last month). Private forecasters’ projections for the next 12 CPI readings are for an increase of 0.4 percent (compared with 0.3 percent in the previous month). Three-year forward expectations declined from 1 percent to 0.9 percent, and are affected by the low level of inflation and by measures to reduce prices in the economy. Medium-term and long-term forward expectations remained anchored within the inflation target range: Medium-term (3–5 years) expectations increased from 1.3 percent to 1.4 percent, while long-term (5–10 years) expectations declined from 2.2 percent to 1.9 percent. The path of the Telbor curve, which in recent months has reflected some probability of an interest rate increase in a year, is currently mostly below the level of the Bank of Israel interest rate. According to the average of projections by private forecasters, some decline in the Bank of Israel interest rate is expected in the next three months, but the rate is expected to increase in about a year.
Real economic activity: Indicators of real economic activity that became available this month point to a growth rate similar to that of recent years, with some acceleration of growth in the fourth quarter of 2015. The first estimate of National Accounts data for the fourth quarter (seasonally adjusted in annual terms) indicates that GDP and business sector product grew by 3.3 percent—a higher rate than in the previous quarters of the year. Increased vehicle imports in the fourth quarter of 2015 were reflected in consumption, investment and import data: Private consumption increased by 5.8 percent, while current consumption declined by 0.3 percent. Fixed capital formation (excluding ships and aircraft) increased by 5.5 percent, and civilian imports (excluding ships, aircraft and diamonds) increased by 28.4 percent. Exports (excluding diamonds and startups) also recorded solid growth of 5.5 percent, and public consumption (excluding defense imports) increased by 10 percent, after no longer being restricted by the transition budget. Foreign trade data for January (in current dollar terms) indicate a decline of 1.3 percent in exports, and of 5.9 percent in imports (excluding ships, aircraft, diamonds, and energy products). The Composite State of the Economy Index increased by 0.2 percent in January, and the readings for previous months were revised upward. The Consumer Confidence Index compiled by the Central Bureau of Statistics showed improvement in January, while the index compiled by Bank Hapoalim deteriorated. The Purchasing Managers Index declined again, to 48.1 points, a level indicating a contraction of activity. The effect of the security situation on activity remains moderate: The number of tourists declined in January by 0.9 percent (seasonally adjusted) compared with December, and there was a decline in the private consumption of services in the National Accounts data for the fourth quarter.
The labor market: The Labor Force Survey for the fourth quarter indicates an entrenchment of employment at a high level. Among the prime working ages (25–64), there was a slight increase in the unemployment rate (4.6 percent compared with 4.5 percent), with a slight decline in the employment rate (76.3 percent compared with 76.4 percent) and in the labor force participation rate (79.9 percent compared with 80.0 percent). Data from the January survey were similar. As is characteristic of an economy with a high level of employment, there has been some increase since the beginning of 2015 in the proportion of those employed in part-time positions. The job vacancy rate declined in January (seasonally adjusted data), but remains high at 3.3 percent. Nominal wages increased by 1.2 percent, and real wages increased by 1.8 percent, in September–November, compared with June–August (seasonally adjusted data). In the past year (September–November 2015 compared with September–November 2014), nominal wages increased by 2.4 percent, compared with 2.1 percent the previous year, while the number of employee posts increased by 2 percent, compared with 3 percent in the previous year. Health tax receipts for November–January were 5.4 percent higher (in nominal terms) than in the corresponding period in the year before.
Budget data: The domestic surplus (excluding net credit) in government activity was NIS 4.2 billion in January 2016. The surplus was lower than the seasonal path by about NIS 1.0 billion, as a result of expenditures (in all government ministries) that were about NIS 2 billion higher than the seasonal path, and revenues that were about NIS 1 billion higher than the seasonal path. Tax revenues totaled NIS 27.4 billion in January, NIS 1.4 billion higher than the seasonal path consistent with the estimate of tax revenue. Tax revenue was about 12 percent higher in real terms than in January of last year (net of the effects of extraordinary activities and legislative changes).
The foreign exchange market: From the monetary policy discussion on January 24, 2016, through February 19, 2016, the shekel strengthened by 1.5 percent against the dollar and by 0.3 percent in terms of the nominal effective exchange rate. Over the preceding 12 months, the shekel appreciated by 2.8 percent in terms of the nominal effective exchange rate.
The capital and money markets: From the monetary policy discussion on January 24, 2016, through February 19, 2016, the Tel Aviv 25 Index declined by about 3.1 percent, in line with the global trend. Nominal yields declined sharply along the entire curve by up to 14 basis points, while on the CPI-indexed curve, medium-term yields declined by a slightly more moderate rate. The makam yield curve traded slightly below the Bank of Israel interest rate. Israel's sovereign risk premium, as measured by the five-year CDS spread, declined to about 84 basis points.
The money supply: In the 12 months ending in January, the M1 monetary aggregate (cash held by the public and demand deposits) increased by 38.9 percent, and the M2 aggregate (M1 plus unindexed deposits of up to one year) increased by 12.6 percent.
The credit market: In January, the nonfinancial business sector issued bonds totaling just NIS 0.6 billion, lower than the average over the past 12 months (about NIS 2.5 billion). Corporate bond spreads increased slightly at the beginning of February, and withdrawals from mutual funds specializing in bonds continued. There were net withdrawals in January of about NIS 4.8 billion from government bond funds, corporate bond funds, and general bond funds. In January, which is generally typified by a relatively low level of mortgages extended, the volume of new mortgages taken out was NIS 4.75 billion. The average share of mortgages taken out for the purpose of purchasing an investment dwelling is on a downward trend, to an average of approximately 15.7 percent in 2015, from an average of approximately 17 percent in 2014. The interest rate on new mortgages issued in January increased in all indexation tracks, by between 7 and 21 basis points, continuing the trend that has been apparent since May.
The housing market: The housing component of the CPI (based on residential rents) declined by 0.5 percent in January, after increasing by 0.4 percent in December. In November–December, home prices continued to increase (by 0.7 percent), and their rate of increase in the past year was 8 percent. The number of transactions in December reached a record of about 9,300, and the monthly average in 2015 was 8,250. The stock of new homes available for sale remained stable in December, at approximately 28,100 homes, a number that is similar to the average over the second half of the past year. The volume of building starts in the past two years indicates that building completions are expected to remain at a high level in the coming quarters as well.
The global economy: This month, there was a continuation of the trend of moderation in global economic activity—particularly a slowdown in developing economies and in world trade—with further deterioration in financial conditions against the background of concern over the stability of banks worldwide, in general, and in Europe, in particular. Stock market indices were very volatile with an increase in risk indices. The OECD revised its global growth forecast for 2016 downward to 3 percent (a decline of 0.3 percentage points from the previous forecast in November). Likewise, there were downward revisions of the forecasts for the US (by 0.5 percentage points), Europe (0.4 percentage points), and Japan (0.2 percentage points). The forecast for China remained unchanged. In the US, fourth quarter growth was only 0.7 percent (in annual terms), with moderation in the growth rate of personal consumption expenditure and continued weakness in the manufacturing sector. The increase in nonfarm payroll employment was lower than expected, although the unemployment rate reached its lowest level since 2008, and wages increased in the past year by 2.5 percent. The rate of inflation remains low. Markets ascribe a very low probability to the Federal Reserve raising the federal funds rate again this year, and while the Fed did not rule out this possibility, the Federal Reserve Chair clarified that global market developments are likely to impact on the path of interest rates. The moderation in Europe was reflected in growth of 1.5 percent in the fourth quarter (compared with the corresponding quarter of the previous year), in contraction of industrial production in January, and in historically low levels of purchasing managers indices. Unemployment continues to decline but its level remains high, at 10.4 percent. Inflation remains low, despite the measures taken by the ECB and the weakness of the euro. In Japan, GDP contracted in the fourth quarter by 1.4 percent and the Bank of Japan reduced the interest rate its pays to commercial banks on deposits to a negative level. Despite that, the yen appreciated sharply. Sweden’s central bank further reduced its negative interest rate to -0.5 percent, due to a further decline in the inflation environment. Data on emerging markets continue to indicate weakness, particularly among commodity exporters. Data published in China continue to reflect moderation in the growth rate, primarily in the manufacturing sector. The price of a barrel of Brent crude oil continued to fluctuate this month in a range between $28–35. The commodities, excluding energy, index increased by about 3 percent.
The main considerations behind the decision
The decision to keep the interest rate for March 2016 unchanged at 0.1 percent is consistent with the Bank of Israel's monetary policy, which is intended to return the inflation rate to within the price stability target of 1–3 percent a year, and to support growth while maintaining financial stability. In view of developments in the inflation environment, in growth in Israel and in the global economy, in the exchange rate, as well as in monetary policies of major central banks, the Monetary Committee’s assessment is that monetary policy will remain accommodative for a considerable time.
The following are the main considerations underlying the decision:
· As expected, the inflation environment remained low this month as well, against the background of price reductions initiated by the government and low energy prices. Inflation expectations up to three years forward, which are slightly below the lower bound of the target range, are influenced by the current low level of inflation and by measures to reduce prices in the economy. Medium- and long-term expectations are anchored within the target range. Further initiated price reductions are expected to be reflected in the next few CPI readings as well. In contrast, wage increases in the economy are expected to support a return of the inflation rate to within the target range.
· The indicators of real economic activity that became available this month point to a growth rate similar to that of previous years, and to some acceleration of growth in the fourth quarter of 2015. According to the first estimate of National Accounts data, GDP grew by 3.3 percent in the fourth quarter, with an increase in all uses except for current consumption. Initial indicators for the first quarter of 2016 point to a mixed picture. The effect of the security situation on economic activity remains moderate, and is reflected mainly in tourism. The picture conveyed by labor market data remains positive, and is reflected in a high level of employment with a continued increase in wages, despite some moderation in the job vacancy rate.
· This month, the trend of moderation in global economic activity continued, in particular a slowdown in developing economies and in world trade, and with a further worsening of financial conditions against the background of concern over the stability of banks, particularly in Europe. The markets ascribe a low probability to an additional interest rate increase in the US this year, and a number of central banks have enhanced monetary accommodation.
· The nominal effective exchange rate has been relatively stable in recent months. From the monetary policy discussion on January 24, 2016, through February 19, 2016, the shekel strengthened by about 1.5 percent against the US dollar and by 0.3 percent in terms of the nominal effective exchange rate. Over the past 12 months there has been an appreciation of 2.8 percent in terms of the nominal effective exchange rate, and its level continues to weigh on growth of exports and the tradable sector.
· In recent months, the increase in home prices accelerated, and they rose by 8 percent over the past 12 months. The volume of new mortgages taken out remains high, despite the increase in mortgage interest rates in recent months. The elevated level of activity in the construction industry is expected to continue to contribute to increasing supply.
The Monetary Committee is of the opinion that the risks to achieving the inflation target and to growth remain high. The Bank of Israel will continue to monitor developments in the Israeli and global economies and in financial markets. The Bank will use the tools available to it and will examine the need to use various tools 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 continue to keep a close watch on developments in the asset markets, including the housing market.
The minutes of the monetary discussions prior to the interest rate decision for March 2016 will be published on March 7, 2016.
The decision regarding the interest rate for April 2016 will be published at 16:00 on Monday, March 28, 2016.