·      The trend of moderate
increase in annual inflation continues, affected primarily by the change in the
trend in energy prices. However, the shekel’s appreciation is expected to defer
the return of inflation to the target, and has also led to a decline in short-term
inflation expectations. Medium term (forward) inflation expectations are
anchored within the target range, and longer-term expectations are around the
midpoint of the target range.

·    Based on indicators of real
economic activity, it may be assessed that net of the atypical effect of
vehicle imports, the economy continued to grow in the first quarter of 2017 by
a rate similar to that in recent quarters. The labor market continues to convey
a very positive picture and is near full employment.

·    The state of real economic
activity worldwide is mostly positive, though there is continued uncertainty
regarding political processes and their economic ramifications. In the US, the
federal funds target rate was increased, and two more increases are expected this
year; in Europe, accommodative policy continues.

·      In recent months there has
been a rapid appreciation in terms of the effective exchange rate.

·      There are signs of the
housing market cooling off, but it is too early to conclude that the trend of
increases has halted.

 

The Monetary
Committee intends to maintain the accommodative policy as long as necessary in
order to entrench the inflation environment within the target range. The Bank
of Israel continues to monitor developments in inflation, the real economy,
financial markets, and the global economy, and will act to attain the monetary
policy targets in accordance with such developments.

 

For the complete file of data accompanying this notice,click here.​

 

 Excel sheet- data​

In the past
year, the annual inflation rate has been increasing moderately, and over the 12
months ending in February the inflation rate was 0.4 percent (Figure 1 in
the data file
). This is the highest rate of inflation since July 2014, but
inflation remains below the target range. The increase in inflation was
supported by the accommodative monetary policy, the increase in energy prices
in the past year, the rise in inflation worldwide, and the wage increases in
the economy. However, enhanced competition in the economy is delaying the
return of inflation to the target, and in recent months, there was also the
impact of the sharp appreciation of the shekel. The appreciation led to a
relatively sharp decline in short-term inflation expectations (Figure 3).
There was some decline in medium-term and long-term expectations as well, but medium-term
forward inflation expectations are anchored within the target range, and longer
term expectations are around the midpoint of the target (Figure 4).

 

In the housing
market, the decline in the rate of new mortgages granted continues, against the
background of the increase in mortgage interest rates, and the decline in the
number of transactions continues as well. Data on building starts indicate that
supply continues to expand. However, despite the previous two observations
pointing to some stability in home prices, it is too early to conclude that the
upward trend has halted.

 

Based on
indicators of real economic activity in the first quarter, it may be assessed
that net of the effect of volatility in vehicle imports, the economy continued
to grow by a rate similar to that of recent months. This is seen in the initial
findings of the Companies Survey (Figure 10), from the Purchasing
Managers Index indicating expansion for several months, and from the Composite
State of the Economy Index. Foreign trade data have been relatively volatile
since the beginning of the year, against the background of fluctuations in
vehicle imports and pharmaceutical exports. The development of exports in
recent months indicates that the virtual standstill in goods exports has
continued while services exports continue to grow. The improvement in world
trade is expected to support exports, but the rapid appreciation of the shekel
is expected to weigh on them. Labor market indicators continue to portray its
strength (Figure 13)—employment is increasing, with a continued rise in
wages, and the number of job vacancies is elevated.

 

The state of
global economic activity portrayed by recent indicators is mostly positive,
though there is continued uncertainty regarding political processes and their
economic ramifications. Growth forecasts for some advanced economies were
revised slightly upward, there was improvement in the rate of world trade
growth (Figure 16), and sentiment indices remain elevated. In the US,
positive data were published regarding the labor market, personal consumption,
the industrial sector, and the real estate industry, and core inflation indices
are around the target. The Federal Reserve raised the federal funds target rate,
and is expected to raise it twice more over the course of the year. In Europe
as well, data were positive with regard to employment, manufacturing, sales and
expectations of future activity. However, core inflation remains relatively low
and accommodative monetary policy continues. Purchasing managers indices in emerging
markets pointed to optimism regarding the development of economic activity,
though growth forecasts for some were reduced. Data on economic activity
published in China indicated stable growth. Energy prices declined in the past
month against the background of increased supply, but the decline did not offset
the upward trend of the past year.

 

Based on the
Research Department’s updated macroeconomic forecast, GDP is expected to grow
by 2.8 percent in 2017 (although the growth rate net of the effect of fluctuations
in vehicle imports is expected to be higher) and by 3.3 percent in 2018.
Inflation is expected to be 0.7 percent in the coming year (ending in the first
quarter of 2018), and to converge to within the target range in the second
quarter of 2018. The monetary interest rate is expected to remain at its
current level of 0.1 percent throughout the coming year and to increase
gradually from the second quarter of 2018.

 

The minutes of the monetary discussions prior to this interest
rate decision will be published on April 20, 2017.

The next decision regarding the interest rate will be
published at 16:00 on Monday, May 29, 2017. ​​