The Bank of Israel decided to raise the interest rate by fifteen hundred percent, and this is the first rise in interest rates seven years after the new governor took office.
The Bank of Israel notes that after a sustained rise in inflation since the beginning of 2018, inflation stabilizes slightly above the lower limit of the target range, and is expected to remain in this area in the coming months as well. Expectations and forecasts for a year from the various sources range around 1%. Expectations for the medium term remained stable within the target range. The rise in wages in the economy and the expansionary fiscal policy will support the continued stabilization of inflation in the target. The main risk is the possibility of a sharp appreciation of the shekel.
An analysis of the latest data and indicators on economic activity leads to the assessment that the economy is converging to the potential growth rate. In the second and third quarters there was a certain slowdown in the economy's growth rate, but the current indicators of activity support the assessment that the economy is in full employment, and in particular, close labor market data indicate a high level of demand.
The US economy remains resilient, but the risks of a worsening "trade war" and increased political risk in Europe continue to dampen momentum. The IMF has revised downward its growth forecast for most of the blocs, and global trade has continued to moderate. Emerging markets have stabilized relatively. The process of normalization of monetary policy around the world continues gradually, but the policy in most economies is still expanding. Financial markets recorded significant declines in most share indices.
Since the last interest rate decision, the shekel weakened by 3.6 percent in terms of the effective nominal exchange rate and by 3.2 percent against the dollar.
House prices have stabilized in recent months. The number of transactions and the volume of mortgages are stabilizing, with a slight increase in mortgage interest.
Even after the interest rate hike by 0.15 percentage points, monetary policy is expansionary and will continue to support the attainment of policy objectives. The Committee estimates that the path of raising the interest rate in the future will be gradual and cautious.
The Bank of Israel continues to monitor developments in inflation, the real economy, the financial markets and the global economy, and will act to achieve monetary policy objectives in accordance with these developments.
Inflation stabilizes slightly above the lower limit of the target range. After a continuous rise in actual inflation since the beginning of 2018, in the past five months annual inflation has ranged between 1.2-1.4%, and the "adjusted indices" are also in a similar environment (Figure 2 in the accompanying data file). Inflation in the prices of tradable goods moderated, mainly as a result of the slowdown in the annual rate of increase in energy prices, despite the recent rise in oil prices and exchange rate depreciation. Inflation in nontradable prices, which is an approximation of the domestic component of inflation, returned to the rise (Figure 3). In the coming months inflation is expected to remain slightly above the lower limit of the target range, and expectations and forecasts for a year from the various sources range around 1%. Expectations for medium terms remained within the target range, although long-term expectations recently declined slightly. Since the previous interest rate decision, the shekel weakened by some 3.6% in terms of the effective nominal exchange rate (Figure 6). The rise in wages in the economy and the expansionary fiscal policy will support the stabilization of inflation in the target. The main risk is the possibility of a sharp appreciation of the shekel. The sharp drop in oil prices in recent weeks may offset the factors that support inflation, but its effect on the "handicapped indices" will be limited.
Since the previous interest rate decision, government bond yields have stabilized for 10 years after rising in the previous months, while the spreads between corporate bond yields and corresponding yields on government bonds rose marginally last month.
According to National Accounts data, in the second and third quarters there was a certain slowdown in the economy's growth rate. In the third quarter, growth was 2.3%. Private consumption grew at a moderate rate, and investment continued to contract despite the stabilization of investment in residential construction, after declining for several quarters. Exports of services (excluding start-up companies) continued to grow, while exports of goods (excluding diamonds) continued to show weakness, while an analysis of the latest data and indicators of activity - and in light of the effect of fluctuations in vehicle imports on GDP - shows that the economy is likely to converge to the potential growth rate.
The macroeconomic picture of the global economy continues to show a decline in momentum. The US economy remains resilient, but the risks of a worsening "trade war" and increased political risk in Europe continue to dampen momentum. The IMF has revised downward its growth forecast for most of the blocs, and the global trade slowdown continues (Figure 20). Global monetary policy is still expanding, but the direction is gradually changing: while in Europe and Japan the interest rate continues to be negative and inflation is below the target, the interest rate hike in the US is expected to continue, and several central banks of other countries have raised interest rates, Coming to become quantitative reduction.