As you know, the Monetary Committee today decided to continue
its accommodative monetary policy and leave the interest rate at 0.1 percent.
The decision was reached on the basis of the comprehensive analysis we
conducted of economic developments in Israel and abroad, developments that
sometimes contradict each other and impact on the decision in opposing
The previous time we met here was three days after the UK
referendum and its surprising outcome. We assessed then that the Brexit
decision could have both short term and medium-long term ramifications. The
short term effects dissipated relatively rapidly, in light, as well, of the
policy response adopted by the Bank of England. However, recent months have
seen political processes in various places worldwide that create uncertainty,
and this impacts on economic uncertainty as well. In Israel, we have received a
batch of data over the past three months that indicates, for now, a marked
improvement in the real economy, and I will discuss them immediately. In
contrast, the inflation environment continues to be very low.
After three months in which the CPI increased by a rate that is
in line with the seasonal path consistent with the inflation target, the CPI
for August surprised to the downside, and inflation is still very
low. The rise in wages in the economy has not yet led to an increase in the
rate of inflation, as the decline in commodity prices allowed manufacturers to
absorb the increase in wages without raising product prices. The administrative
price reductions’ impact on inflation is beginning to wind down, and assuming
that commodity prices, in particular fuels, will remain stable, and that the
moderation of deflationary forces worldwide will continue, then the increase in
wages and the growth in private consumption are expected to support the
convergence of the inflation rate to within the target, though it is likely
that this convergence will take longer than we expected in the past. Despite
the fluctuations in the inflation rate in the short term, the expectations for
the medium and long terms continue to be anchored within the target range.
After relatively low growth in the first quarter, which we
assessed was the result of factors of a transitory nature, in recent weeks a
number of figures have accumulated that point to a recovery in growth,
supported by the accommodative monetary policy. In the second quarter, the
economy grew by 4 percent, private consumption continued to grow by a rapid
rate, though for the first time in a while there was also adequate growth in
exports, after a prolonged standstill. It is very important that the recovery
in exports continues, and that it is accompanied by continued growth in
investment in the principal industries. This is so that the Israeli economy will
be able to benefit from more balanced growth, based not only on private
consumption reflected in growth of domestic trade and services industries, but
also on export industries, in which the economy has a comparative advantage and
high productivity. Growth in the coming years will also be impacted by the
fiscal impulse, the result of growth in government expenditure and the
relatively high deficit target in the 2017-2018 budget.
As far as can be assessed based on foreign trade data,
preliminary results of the Companies Survey, and various confidence and
expectations indices, in the third quarter as well economic activity continues
to grow by a relatively high rate. The labor market continues to provide strong
data—low unemployment, high employment and participation rates, a high job
vacancy rate and a rapid increase in wages. Until recently, it was difficult to
explain how all these fit in with the economy’s relatively moderate growth. The
current growth picture is consistent with the labor market being close to full
employment, and a shortage of workers is seen in many industries.
The global economy continues to grow by a very moderate rate,
and last week the OECD revised its growth forecasts slightly downward. World
trade growth continues to slow, and the political uncertainty in some advanced
economies is likely to impact on development of trade as well, to the extent
that there is an increase in the weight of forces advocating increased
limitations on trade. Inflation in many advanced economies is also still very
low. The absence of a recovery leads to major central banks continuing to adopt
very accommodative monetary policy, with some of them exploring new tools in
order to increase the effectiveness of policy. A postponement of the increase
in the federal funds rate in the US reflects the fact that policy makers were
still uncertain that the recovery is robust enough to continue the process of
monetary policy normalization, and we will need to continue to monitor
developments there. The Bank of Israel continues to examine the impact of
monetary policy of various central banks on the global economy in general, and
on the policy required in Israel in particular.
In the past quarter the appreciation in the effective exchange
rate renewed, offsetting some depreciation that occurred in the previous
quarter. Some of the appreciation occurred in light of the relatively positive
data published about the Israeli economy. However, the exchange rate level is
impacted to a great extent by the very accommodative monetary policy of major
central banks, which contributes to the over-appreciation of the shekel. The
Bank of Israel policy in the foreign exchange market moderates the appreciation
forces, supports recovery of exports, and is an integral part of monetary policy.
Housing market developments attract a lot of attention—from the
public, the media, and policy makers. Recently, encouraging signs have been
seen in this market—in the past two readings the home prices index stabilized;
the most recent update of building starts showed that they resumed an increase,
and their number in the past year is high, but in parallel with the growth in
starts there is a decline in the number of building completions. It cannot yet
be determined that a change in trend in the market has occurred, and the
government will need to continue working intensively in order to increase the
supply in a consistent manner. The increase in mortgage interest rates after a
prolonged decline is mainly the result of the increase in risk in the housing credit
market and of regulation in the sector, as well as of mortgages becoming more
expensive from the banks’ perspective, and it should work to reduce demand.
Today, the Research Department published its revised forecast
which, as recalled, is a conditional forecast based on assumptions
regarding exogenous variables. The forecast for economic growth was
revised upward—by 0.4 percentage points for 2016, with a growth rate of 2.8
percent now expected, as a result of the positive surprise in second quarter
growth, and by 0.2 percentage points for 2017, to 3.1 percent, mainly as a
result of the assessment that public and private consumption will continue to
grow by a relatively rapid rate. The interest rate path expected by the
Research Department is similar to that of the previous forecast, in which the
interest rate is expected to remain at its current level until the third
quarter of 2017, and then to begin to rise at a slow pace. The inflation rate
path is slightly lower than in the previous forecast, and is expected to return
to within the target only in another year.
In conclusion, in the third quarter monetary policy operated
against the background of several processes with an uneven impact on policy.
While economic activity in Israel is recovering and the labor market continues
to display strength, the inflation environment is still quite low and the
inflation rate is markedly lower than the target. Monetary policy worldwide is
very accommodative against the background of absence of recovery, and the exchange
rate remains appreciated. An analysis of the range of developments leads the
Monetary Committee to continue to assess that monetary policy in Israel will
remain accommodative for a considerable time, with the use of foreign exchange
purchases, as necessary, in order to moderate the effects of the moderation in
world trade and of the fluctuations in worldwide exchange rates on activity and
inflation in Israel.
The Monetary Committee assesses that the current monetary policy
is consistent with the policy required in view of the processes I have
presented, and the Committee does not see a need to use additional policy
instruments at this stage. All these remain available to the Committee should
it see a need for them.
As you know, the Committee decided to change the frequency of
the interest rate decisions, and during 2017 we will move to a framework of two
decisions per quarter, similar to the practice at many central banks today.
Most Committee members were of the opinion that this framework will enable us to
analyze economic developments in a deeper manner, and will contribute to the
quality of the decisions over time. Within this framework as well we will
continue to hold these briefings with you once every three months.
I would like to take this opportunity to wish you and your
families a happy New Year, and a year of growth, productivity, stability and
success for all of us, in all areas.
Happy New Year—Shana Tova!