Background conditions
Inflation data: The Consumer Price Index for March increased by 0.3 percent, while forecasters had projected a slightly higher increase of 0.4 percent, on average. A rise in fuel prices led to an increase of 1.3 percent in the transport and communications component and contributed the main part of the increase in the CPI, followed by the contribution of the housing component, which increased by 0.7 percent. There were seasonal declines in the clothing and footwear and fruit and vegetables components. The rate of inflation as measured by the change in the CPI over the past 12 months was negative 1 percent, similar to the inflation rate over the 12 months that ended in February. Energy prices contributed 0.9 percent to the decline in the CPI measured over the previous 12 months, and food, fruit and vegetable and communications prices reduced the CPI by 0.2 percent each. CPI components representing tradable items declined by 2.4 percent in the past 12 months, and those representing nontradable items declined by 0.1 percent.
Inflation and interest rate forecasts: The private forecasters’ projection for the next 12 CPI readings is 1.1 percent, on average, compared to 1.2 percent last month, while expectations derived from banks’ internal interest rates are 0.6 percent, compared to 0.4 percent last month. Twelve-month ahead inflation expectations derived from the capital market remain volatile, and are currently 0.8 percent, and expectations for two years are 1.1 percent. Medium-term expectations ranged around 1.5 percent, while expectations for longer terms remained stable around the midpoint of the inflation target range. Most private forecasters do not expect a reduction in the Bank of Israel interest rate in the next few months; however, the Telbor curve continues to point to some probability of such a reduction.
Real economic activity: Indicators of activity in the first quarter of 2015 point to a continuation of the moderate growth rate that has prevailed in the past two years. Goods exports (excluding ships and aircraft, and diamonds) in March declined by 4.6 percent, affected by, among other things, work disruptions at Israel Chemicals and a sharp decline in the export of aeronautics following an atypical increase in the previous two months. Net of these, goods exports increased by 3.3 percent in March, and declined by 0.9 percent in the first quarter. However, this figure is in dollar terms, and was negatively impacted by the strengthening of the dollar against other currencies. In March, the recovery in tourist arrivals was halted. The export of business services (excluding startup companies) increased by 1 percent in January compared with the fourth quarter of 2014. All major components of goods imports increased in March. Data from the Companies Survey for the first quarter indicate stability in business sector activity. The Composite State of the Economy Index increased by 0.4 percent in March, affected by an increase in imports of consumer goods and manufacturing inputs (in March) and in the Industrial Production index (for February). The business sector climate index continues to indicate a monthly growth rate of 0.23 percent. The Purchasing Managers Index maintains a range around 50 points, increasing this month to 50.2. The Consumer Confidence Index compiled by the Central Bureau of Statistics increased this month to its highest level since 2011, and the index compiled by Bank Hapoalim declined slightly this month, though it remains relatively high compared with its level in 2014.
The labor market: Labor market data continue to present a positive picture: Labor Force Survey data for February are similar to those for January among 25–64 year olds (the main working ages), and indicate that unemployment stabilized at a low level, with the labor force participation rate and the employment rate at a high level. Over time, the survey data indicate an extended increase in employment in trade and services and stability in manufacturing employment. Nominal wages increased by 0.2 percent, and real wages by 0.1 percent, in November–January, relative to August–October (seasonally adjusted data). Stable growth continued in health tax receipts, which were about 5.5 percent higher (in nominal terms) in January–March than in the corresponding period one year ago. In January, the number of employee posts declined by 0.8 percent.
Budget data: The domestic surplus (excluding net credit) in January-March was about NIS 2.5 billion, compared with a surplus of NIS 0.5 billion in the corresponding period of last year. Based on trend data, tax revenues in March were higher than in previous months and higher than in the corresponding period last year, and since the beginning of the year tax revenues have increased by 5.3 percent, in real terms, compared with the corresponding period of last year. Gross domestic VAT revenues increased by 10 percent in real terms, compared with March of 2014 (7 percent net of real estate taxes). Total domestic expenditure of government ministries in January-March was about 4 percent higher, in nominal terms, than in the corresponding period of last year.
The foreign exchange market: From the monetary policy discussion on March 22, 2015, through April 24, 2015, the shekel strengthened by about 3 percent against the dollar, and by 1.3 percent against the euro. The shekel strengthened by about 1.7 percent in terms of the nominal effective exchange rate.
The capital and money markets: From the monetary policy discussion on March 22, 2015, through April 24, 2015, the Tel Aviv 25 Index increased by about 4 percent. Government bond yields declined on the nominal curve, similar to the global trend. The yield on unindexed bonds with 9 years to maturity declined to a low of 1.4 percent. On the CPI-indexed curve, as well, there was a moderate decline in yields. There were slight changes along the makam yield curve, and most of the curve was trading at a yield lower than the Bank of Israel interest rate. Israel's sovereign risk premium, as measured by the five-year CDS spread, remained virtually unchanged, at about 75 basis points.
The money supply: In the twelve months ending in March, the M1 monetary aggregate (cash held by the public and demand deposits) increased by 48.5 percent, and the M2 aggregate (M1 plus unindexed deposits of up to one year) increased by 12.3 percent. During April, the pace of net withdrawals from money market funds moderated.
The credit market: In January, the outstanding debt of the business sector increased by about NIS 13.3 billion (1.6 percent) to around NIS 826 billion. The increase derived mostly from about NIS 9.1 billion in new banking credit taken out, a significant raising of funds compared with net redemptions in the past two years. In March, the nonfinancial business sector issued about NIS 2.9 billion in bonds, slightly higher than the monthly average over the preceding 12 months of NIS 2.6 billion. There were net withdrawals from corporate bond mutual funds in March and in the first half of April, totaling about NIS 300 million. Corporate bond market spreads declined slightly in March as well, following a decline in February.
Outstanding household debt increased in January by NIS 1.8 billion (0.4 percent), of which housing debt increased by NIS 1.3 billion (0.4 percent). New mortgage volume increased to NIS 5.6 billion in March, with a decline in the share of mortgages extended to buyers purchasing a home as an investment, and a continued increase in the share of fixed-rate mortgages taken out. In March, the interest rate on new mortgages declined across all indexation tracks—in the unindexed track and in the CPI-indexed fixed rate track the interest rate declined by 0.1 percentage points, and in the CPI-indexed variable rate track the interest rate declined by 0.3 percentage points.
The housing market: The housing component of the CPI (based on residential rents) increased by 0.7 percent in March, and by 2.3 percent over the past 12 months. In January–February, home prices increased by 0.4 percent, and in the 12 months ending in February, they increased by 3.7 percent. The number of housing transactions declined in February for all categories of buyers, including investors, though it remains relatively elevated, apparently due to the completion of sales of homes that were not sold during the period of waiting for the outcome of the zero VAT law. The number of new homes available for sale increased slightly, after declining in the previous two months. The number of building starts has been high for the past two years, and is expected to support continued supply of housing in the near term.
The global economy: The IMF updated its global growth forecast this month. There was an improvement in growth forecasts for the eurozone and Japan, and a downward revision in projected US growth. The IMF revised its world trade volume forecast downward, and emphasized that the moderation in its growth in recent years derives partly from long-term structural factors as well. IMF economists see a decline in the risk of deflation or recession in most major economies. In the US, disappointing data were published this month—some reflected events with only transitory effects, such as severe weather and a port workers strike on the West Coast, and some reflected the effect of the strength of the dollar and the impact of low fuel prices on the energy market. Nonfarm payroll growth in March was markedly lower than projected; personal consumption expenditure was quite moderate in January–February, though it recovered somewhat in March; and the Purchasing Managers Index for manufacturing companies declined to its lowest level in two years. The inflation environment remains low. In view of these, uncertainty continued regarding the date on which the federal funds rate will begin to lift off, and the path of interest rates derived from market expectations declined again. Activity remains very moderate in Europe, and the uncertainty continues regarding how the crisis in Greece will develop. With that, there are factors that are contributing to recovery—the weakness of the euro, easing of financial conditions, and the low energy prices. The consumer confidence index strengthened, reaching its highest level since the crisis began, industrial production in February surprised to the upside, and purchasing managers indices point to an improvement in new orders. The inflation rate remains negative. The ECB began to implement its quantitative easing program, and its economists assess that there is clear evidence of its effectiveness. Disappointing data were published in Japan, both on the production side and on the private consumption side. In China, too, current data disappointed, and against that background the central bank there adopted monetary easing measures. This month, there were no interest rate changes at the various central banks, after the previous month’s numerous reductions. There was a mixed trend on stock markets worldwide. Commodity prices were mostly stable, while the price of a barrel of oil corrected upward, to $65, compared with $53 just prior to the previous monetary policy discussion.
The main considerations behind the decision
The decision to keep the interest rate for May 2015 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 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:
v The CPI for March increased by 0.3 percent, led by fuel prices and by the housing component. The rate of inflation as measured over the past 12 months was negative 1.0 percent. Short-term inflation expectations from various sources are near the lower bound of the inflation target range, or slightly below it. Longer-term expectations remained stable around the midpoint of the target range.
v Indicators of economic activity for the first quarter point to the economy continuing to grow at the moderate rate of the past two years. Companies Survey data support this assessment. The Composite State of the Economy Index increased by 0.4 percent in March, and tax revenues increased. Net of extraordinary effects, goods exports increased by 3.3 percent in March, and declined by 0.9 percent in the first quarter, in dollar terms.
v The IMF revised its growth forecasts for Europe and Japan upward, and lowered its projections for US growth and world trade volume. There are signs of recovery in current eurozone data, and some of the disappointing data in the US reflect one-off factors. Market expectations indicate that the date for liftoff of the federal funds rate has been pushed off.
v From the monetary policy discussion on March 22, 2015, through April 24, 2015, the shekel strengthened by 3 percent against the dollar, and appreciated by 1.7 percent in terms of the nominal effective exchange rate. For the year to date, there has been an effective appreciation of 3.7 percent in the shekel, against the background of accommodative monetary policy in several major economies, among other reasons. A decline in the projected rate of world trade growth and continued appreciation are liable to weigh on growth of exports and of the tradable sector.
v The increase in home prices continues, and new mortgage volume remains elevated. The number of transactions moderated slightly in February, among investors as well.
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 May 2015 will be published on May 11, 2015.
The decision regarding the interest rate for June 2015 will be published at 16:00 on Monday, May 25, 2015.