· The annual inflation rate
and 1-year inflation expectations increased but remain below the target range,
and expectations for the medium and long terms are anchored within the target. The
increase in nominal wages and strong economic activity will contribute to an
increase in the inflation rate, while the appreciation that has occurred in the
shekel, the increased competition in the economy and measures adopted by the
government are expected to delay the return of inflation to the target range.
· National Accounts data for
the first quarter (net of the volatility in vehicle imports) and indicators of second
quarter activity show that the economy continues to grow at a solid pace, with
a decline in private consumption’s contribution to growth and an increase in
the contribution of exports and investment. The labor market continues to convey
a very positive picture and is near full employment.
· Global activity and world
trade continue to improve gradually, and according to forecasts, the
improvement is expected to continue. The political risk in Europe declined
significantly. The interest rate in the US is expected to be increased in June,
while in Europe and Japan the accommodative policy continues.
· In recent weeks, the shekel
weakened against the euro and strengthened against the dollar. The effective
exchange rate remains stable at an appreciated level.
· Housing market indicators continue
to point to a cooling of the market, and stability in home prices is apparent over
the past few months.
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, the
financial markets, and the global economy, and will act to attain the monetary
policy targets in accordance with such developments.
Inflation in the
12 months ending in April was 0.7 percent. The annual inflation rate and
one-year inflation expectations increased in recent months, though they are
still lower than the target range (Figures 1 and 4 in the data file). The
increase in nominal wages and strong economic activity, particularly as a result
of domestic demand, are reflected in increases in the prices of nontradable items,
while inflation in tradable goods remains negative (Figure 3), due to a
large extent to the continued appreciation of the shekel, and despite energy
prices and global inflation acting to increase it. Since March, there has been
an increase apparent in inflation expectations for all terms, against the
background of an increase in actual inflation and continued accommodative
monetary policy. The increasing competition in the economy, as well as
additional policy measures announced by the government (reducing purchase tax
and customs on various products and lowering the cost of afterschool care), may
continue to slow the return of inflation to the target range.
in vehicle purchases had an atypical effect on National Accounts data in the
fourth quarter of 2016 and the first quarter of 2017. However, net of this
effect, the economy has been growing strongly for approximately a year and a half,
and the pace may even be higher than the long-term growth potential. In the
first quarter, the improvement in growth of exports continued, against the
background of the expansion of world trade. Private consumption, which drove growth
in 2016, continues to grow (net of vehicle purchases) but at rates that are not
exceptional. Excluding the data on goods exports, the initial indicators of second
quarter economic activity, such as data on tax revenues and the Composite State
of the Economy Index, suggest that the strong growth is continuing in the quarter.
Labor market indicators continue to point to its robustness: the unemployment rate
is at an historic low, the employment rate is at a record high, and in the past
year the improvement in these indicators was sharper among those with lower
levels of schooling (Figure 13). The pace of wage increases has accelerated
(Figure 14), and the number of work hours per employee has increased.
For the past few
months, housing market data have indicated moderation in demand for homes, reflected
in a decline in transaction volume among all types of purchasers, a decline in
the pace of new home sales, and continued decline in the flow of new mortgages
taken out. There are a number of factors to which this moderation in demand may
be attributed, including various policy measures adopted by the government and
the increase in mortgage interest rates since mid-2015. In recent months,
interest rates on mortgages have stabilized (Figure 8). The moderation
in demand alongside the continued increase in supply have led to the apparent stability
in home prices.
activity and world trade continue to improve gradually (Figure 17). The
IMF and investment houses forecast that the improvement will continue, and
sentiment indices are high. The weakness in first quarter growth in the US derives
partially from transitory and seasonal factors, and most of the data indicate
improvement in the second quarter. Despite some moderation in inflation,
assessments are that the Federal Reserve will raise the federal funds rate at
its next meeting. The new administration’s economic policy remains a source of
uncertainty. In Europe, the results of France’s presidential elections markedly
lowered the risk to the continued existence of the eurozone, and the economy
continued to improve. Growth in the past two quarters was relatively high, the
unemployment rate continues to decline, but inflation is still below target and
the ECB is continuing its accommodative policy. In Japan as well, growth data
are relatively strong, but inflation remains low and accommodative policy
continues. In emerging markets, in general, the positive trend continues. The modest
moderation in China is mainly a result of policy measures intended to tighten
financial conditions. Energy prices were volatile, while the index of prices of
commodities excluding energy was relatively stable.
The minutes of the monetary discussions prior to this interest
rate decision will be published on June 12, 2017.
The next decision regarding the interest rate will be
published at 16:00 on Monday, July 10, 2017, following which the Governor will
hold a press briefing.