Background conditions


Inflation data: The Consumer
Price Index for November declined by 0.4 percent, more than forecasters’
predictions of a 0.1 percent decline, on average. The decline is partly
explained by a seasonal decline in the fruit and vegetables component of 4.3
percent, which was large compared with the decline in recent years, and a
seasonal increase of 1.5 percent in the clothing and footwear component that
was low compared with the increase in recent years. The inflation rate as
measured by the change in the CPI over the past 12 months was -0.3 percent, similar
to the figure for last month. The effects of energy prices and administrative price
reductions, which acted toward a decline in the CPI in the past two years, are
dissipating—the change in the CPI in the past 12 months net of those effects is
only slightly higher than the change in the general CPI. Over the past 12
months, prices of tradable goods in the CPI declined by 1.7 percent, and the
prices of nontradable items increased by 0.4 percent.


Inflation and interest rate forecasts:
One-year term inflation expectations were impacted by the surprise in the CPI
for November. Inflation expectations derived from the capital market increased
slightly, to 0.6 percent, and the average of private forecasters’ projections
declined slightly to 0.6 percent. Expectations for inflation derived from
banks’ internal interest rates increased slightly, after half a year of
stability, to 0.4 percent. Forward expectations for medium and long terms
fluctuated as well—they increased following the US elections and declined after
the publication of the November CPI. Third-year forward expectations are 1.1
percent, compared with 1.4 percent prior to the previous monetary policy
discussion, and 3–5 year forward expectations are 1.4 percent, compared with 1.5
percent prior to the previous monetary policy discussion. Longer-term forward expectations
(5 to 10 years) were unchanged at 2.4 percent. Based on the makam curve,
the Telbor curve and forecasters’ assessments, there is a high probability of a
rise in the Bank of Israel interest rate to 0.25 percent in about a year.


Real economic activity: The
picture of real economic activity remains positive, and various indicators point
to a stable rate of growth. Foreign trade trend data indicate growth in imports,
and contraction of exports due to a temporary slowdown in exports of electronic
components. Goods exports excluding electronic components reached $3.5 billion
in November (seasonally adjusted), and are high relative to their level in the recent
period. Although total imports of consumer goods declined by 4.1 percent in
September–November, led by a decline in durable goods imports (mainly transport
vehicles), imports of current consumption goods increased by 10.1 percent and
capital goods imports increased by 4.1 percent. The Composite State of the
Economy Index continues to indicate a high rate of growth of activity, increasing
by 0.3 percent in November, led by the index of goods exports. Preliminary data
from the Companies Survey for the fourth quarter also indicate that business
sector product continued to grow by a rate similar to that of previous
quarters. The Purchasing Managers Index and Consumer Confidence Indices compiled
by the Central Bureau of Statistics and by Bank Hapoalim increased in November,
with the latter at a six-year high.


The labor market: The picture
conveyed by the labor market remains very positive. Labor Force Survey data indicate
that despite a slight decline in November, the prime working ages (25–64) continue
to show a high labor force participation rate (79.8 percent, compared with 80.1
percent in October) and employment rate (76.6 percent, compared with 76.9
percent), and a low unemployment rate (3.9 percent, unchanged from October),
while the job vacancy rate remains high, at 3.8 percent (seasonally adjusted). Health
tax receipts for September–November were 6.3 percent higher (in nominal terms)
than in the corresponding period in the year before.


Budget data: The government was
late in publishing data on tax revenues and the deficit for November. A
preliminary analysis of the data indicates that the deficit in November, after
adjusting for postponements of tax refunds that month due to labor sanctions at
the Israel Tax Authority, was about NIS 400 million smaller than that in the
seasonal path consistent with achieving the deficit target. The low deficit in
November reflects expenditures lower than the path. Tax revenues (after the
adjustment) were lower than the seasonal path, but these were offset by
National Insurance Institute surpluses.


Staff forecast: This month, the
Research Department updated its macroeconomic forecast. The notice of the
forecast is being published in parallel with this release. Compared with the
previous quarterly forecast, the current forecast incorporates a similar
assessment regarding the development of inflation and the interest rate, and a more
positive assessment regarding growth for 2016: the inflation rate is expected
to be 1.0 percent over the coming four quarters (similar to the previous
forecast), so that it is expected to return to within the target range in the fourth
quarter of 2017. The Bank of Israel interest rate is expected, according to the
staff forecast, to remain at 0.1 percent during the coming period, to increase
to 0.25 percent during the fourth quarter of 2017, and to increase to 0.5
percent in the second half of 2018. GDP is expected to grow by 3.5 percent in
2016 (compared with 2.8 percent in the previous forecast) because growth data
for the first half were revised upward and growth in the third quarter was
higher than expected. GDP is expected to grow by 3.2 percent in 2017 (compared
with 3.1 percent in the previous forecast), and by 3.1 percent in 2018. The forecast
development of GDP reflects a gradual transition to growth based less on
domestic uses and more on exports.


The foreign exchange market:
From the monetary policy discussion on November 27, 2016, through December 23,
2016, the shekel strengthened by 1.3 percent against the dollar, and appreciated
by 2.0 percent in terms of the nominal effective exchange rate. Over the
preceding 12 months, the shekel appreciated by 5.6 percent in terms of the
nominal effective exchange rate.


The capital
and money markets:
From the monetary policy discussion on November 27,
2016, through December 22, 2016, the Tel Aviv 25 Index increased by about 0.4 percent.
In the government bond market, there were slight declines of up to 7 basis
points in yields along the unindexed curve, and a slight steepening of the CPI-indexed
bonds curve. The makam curve traded at a yield above the Bank of Israel
interest rate. Israel’s sovereign risk premium, as measured by the five-year
CDS spread, decreased to about 69 basis points.


The money supply: In the 12
months ending in November, the M1 monetary aggregate (cash held by the public
and demand deposits) increased by 18.1 percent, and the M2 aggregate (M1 plus
unindexed deposits of up to one year) increased by 7.9 percent.


The credit market: In the
third quarter, business sector debt increased by about NIS 10.5 billion (1.3
percent) to around NIS 841 billion. The increase derived mostly from a
quantitative increase of about NIS 14.8 billion in nonbank debt, mainly through
tradable bonds in Israel. In November, the business sector (excluding banks, insurance
companies and foreign companies) issued NIS 3.3 billion in bonds, about half by
the investment and holding company industry. The average monthly issuance for
the year to date is about NIS 3.5 billion. Corporate bond spreads (excluding
banks and insurance companies) decreased slightly at the beginning of December,
to 2.93 percentage points, on average, continuing a decline in previous months.
The balance of household debt increased in the third quarter by about NIS 11
billion, to total NIS 501 billion (an increase of 2.2 percent); about NIS 6 billion
of the increase is in housing debt, which has a total balance of NIS 337
billion (an increase of about 1.8 percent). In November, the total volume of
new mortgages taken out was NIS 4.7 billion. Over the past year, there has been
a moderate downward trend in monthly mortgage volume. The average interest rate
on mortgages continued to increase in November on all tracks. On the
CPI-indexed, fixed-rate track, the rate increased by 0.06 percentage points, and
on the CPI-indexed, variable-rate track, the rate increased by 0.04 percentage
points. The interest rate on the unindexed fixed-rate track increased by 0.05
percentage points, and on the unindexed variable-rate track the interest rate increased
by 0.09 percentage points.


The housing market: The
housing component of the CPI (based on residential rents) declined by 0.1
percent in November, following a decline of 0.3 percent in October. Home prices
increased by 0.9 percent in September–October, following a similar increase in August–September.
Over the 12 months ending in October, home prices increased by 8.7 percent, compared
with an increase of 8.4 percent in the 12 months ending in September. The number
of home transactions declined markedly in October, with only about 3,725 transactions
carried out, but this was impacted on by the small number of business days due
to the Jewish holidays in the month. New home sales increased slightly in October,
to about 2,344 (seasonally adjusted), and the stock of new homes available for
sale continued to increase, to about 30,300 (seasonally adjusted). In the third
quarter, there were 13,000 building starts (seasonally adjusted), and in the
past four quarters construction began on about 51,100 homes (seasonally
adjusted). With that, the pace of building completions is slower, and in the
same period only about 41,700 homes were completed. It should be noted that the
initial publication of building starts data is generally biased to the
downside, and the data tend to be revised upward subsequently.


The global economy: Data that
became available on the global economy indicate some improvement in the rate of
growth, but it remains moderate. The OECD revised its 2017 global growth
forecast slightly upward, to 3.3 percent from 3.2 percent, in light of the
assessments that the new US administration will adopt expansionary fiscal
policy. However, the forecast for world trade growth was revised downward, to
2.9 percent from 3.2 percent, and the institution noted the concern of
increased barriers to world trade. Producer price indices in major economies,
primarily China, are increasing and will support a rise in inflation worldwide.
In the US, the Federal Reserve increased the federal funds target rate. Based
on the median path seen by Federal Open Market Committee members, three
additional increases are expected in 2017; based on market assessments, the
pace will be slightly more moderate but still higher than expected previously.
In the labor market, growth in nonfarm payrolls and the decline in unemployment
continued in November, with the unemployment rate reaching 4.6 percent, below
the Federal Reserve’s long term forecast, but the annual increase in salaries
declined to 2.5 percent, compared with 2.8 percent in October. Personal
consumption expenditure continues to drive the economy, and data from the real
estate market were positive, but weakness in industrial production continues.
Core inflation indices are near the target of 2 percent. In Europe, the moderate
growth continues, and the ECB forecasts that growth in the coming three years
will be 1.6–1.7 percent. The economy is exposed to political risks and to the undermining
of banking system stability. These risks increased this month with the
resignation of the government in Italy and the strengthening of tensions
related to the program of assistance to Greece. Unemployment declined to 9.8
percent, the lowest level since 2009, and private consumption is driving the
economy. The ECB reduced the scope of monthly purchases of bonds but extended
the program until December 2017, a step seen overall as expansionary. The
inflation rate is increasing moderately, as the impact of the decline in energy
prices dissipates, but it is still markedly lower than the target. In Japan,
accommodative policy remained in place, and macro data indicated some
improvement in activity. In various emerging market economies as well there was
some improvement in activity, against the background of stability in commodity
prices and strengthening of demand from China, but this improvement comes after
long weakness. The weakness in world trade and the process of raising interest
rates in the US place the recovery in some emerging economies at risk. In
China, positive data on activity were reported, and there was a moderate
increase in inflation. The price of a barrel of Brent crude increased this month
by more than 10 percent, to around $55, after OPEC decided to reduce output. The
index of commodities excluding energy declined this month by about 3 percent,
after increasing in the previous month.



The main considerations behind the


The decision to keep the interest
rate for January 2017 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 range of 1–3 percent a year, and to support
growth while maintaining financial stability. The Monetary Committee continues
to assess that in view of the inflation environment, and of developments in the
global economy, in the exchange rate, as well as in monetary policies of major
central banks, monetary policy will remain accommodative for a considerable


Following are the main considerations
underlying the decision:


·    The CPI for November declined
by 0.4 percent, a greater decline than had been expected, and below the
seasonal path consistent with achieving the inflation target. Inflation as
measured by the change in the CPI over the past 12 months remains negative, despite
the direct effects of initiated price reductions and of the decline in energy
prices dissipating. Short-term inflation expectations are below the target,
while longer term expectations derived from the capital market remained
anchored near the midpoint of the target range. The Research Department
assesses that the inflation rate will be at the lower bound of the target range
within about a year.

·     The picture of real
economic activity remains positive. Based on preliminary data from the
Companies Survey, it may be assessed that in the fourth quarter as well,
business sector product grew at a pace similar to that of previous quarters.
Labor market data continue to indicate a high level of employment, a low level
of unemployment, and a continued increase in wages. The Research Department
assesses that GDP increased by 3.5 percent in 2016, and that in the coming
years it will continue to grow by an annual rate of around 3 percent or
slightly higher.

·     The global economy
continues to grow at a slow pace, with a decline in the rate of expansion of
world trade. Political developments in some advanced economies are likely to
weigh further on trade growth. In the US, there was an acceleration in activity
in the second half of the year, while in Europe growth is moderate and the risks
to its persistence are relatively large. The US federal funds rate was
increased and the expected future interest rate path rose as well; in contrast,
the ECB extended the horizon of its quantitative easing.

·     From the monetary policy
discussion on November 27, 2016, through December 23, 2016, the shekel strengthened
by 1.3 percent against the dollar, and appreciated by 2.0 percent in terms of
the nominal effective exchange rate. The shekel has appreciated by 5.6 percent over
the past 12 months in terms of the nominal effective exchange rate, against the
background of appreciation of 6.3 percent vis-à-vis the euro. The level of the
effective exchange rate continues to weigh on the growth of exports and of the
tradable sector.

·     Home prices continue to rise
at a high rate, even though the stock of unsold new homes is high, and in the
past year there have been more than 50,000 building starts. The slowdown in monthly
mortgage volume continues, with a continued increase in mortgage interest


The Monetary Committee is of the
opinion that the risks to achieving the inflation target 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
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.


minutes of the monetary discussions prior to the interest rate decision for January
2017 will be published on January 9, 2017.

decision regarding the interest rate for February 2017 will be published at
16:00 on Monday, January 23, 2017.