Bank of Israel cuts growth forecast

Karnit Flug
Karnit Flug

Bank of Israel Governor Karnit Flug has also dampened rate hike expectations in 2018 by stressing lower than expected inflation.

The Bank of Israel's research department has cut its growth forecast for 2017 from 3.4% to 3.1%.

Governor of the Bank of Israel Karnit Flug said, "The relatively low first-half growth data led to a downward revision of the forecast for 2017, to 3.1%, but as noted this reflects developments that have already occurred, and there is no change in the growth forecast for 2018: 3.3%."

She added, "The forecast reflects a gradual shift to growth based less on private consumption and more on exports, supported by the improvement in world trade, after recent years when private consumption drove growth. The greater than expected decline in inflation in recent months led to the inflation rate only being expected to enter the target range in the third quarter of 2017, and the interest rate path is slightly lower than what was presented in the previous forecast."

Flug continued, "Israel’s economy has been, for some time, in a relatively unique environment of very low inflation with growth at near its potential rate, and a labor market at full employment. Since we met here at the previous press briefing, there has been considerable volatility in inflation, but overall it remains very low. The moderation in growth is apparently transitory, and we assess that the economy will continue to grow at around its potential rate."

On the shekel she said, "A trend of some depreciation of the shekel in terms of the effective exchange rate halted, and recently there has been renewed appreciation. The picture of the global economy appears more optimistic, which is expected to be reflected in a moderate reduction in the extent of monetary easing worldwide."

On inflation, Flug said, "Inflation data in recent months were volatile, as noted, and some of the CPI readings were surprising. However, overall, in the past year there wasn’t a major change in the inflation environment, which remains below the target range, as seen in annual inflation and in short-term expectations. A long term analysis indicates that the moderation of inflation encompasses most components of the CPI, including housing. As we have noted in the past, in addition to the appreciation of the shekel, government measures to reduce the cost of living and changes in consumer behavior and in competition in the economy are acting to reduce prices. Recently, there has also been a moderation in inflation around the world. In contrast, the strong demand will continue to act to increase inflation. Until recently, employers were able to absorb the wage increases in the economy without raising prices, because the decline in prices of inputs, chiefly energy, led to increased wages not being reflected in a similar increase in unit labor cost. The increase in wages did moderate recently; however, as the process of decline in prices of other production factors was exhausted, the wage increase is expected to have an inflationary effect. Long-term expectations didn’t overreact to the short term changes and remained anchored within the target range, and thus reflect market participants’ confidence in the inflation targeting regime."

"Home prices renewed their increase in recent months, but at a moderate rate relative to the past, while other indicators continue to point to the market cooling off, such as the low level of number of transactions, and the continued decline in monthly mortgage volume despite a moderate decrease in the interest rate in recent months. To the extent that government efforts to continue increasing the supply of homes continue, they will support the stabilization and subsequent decline of prices."

Published by Globes [online], Israel business news - www.globes-online.com - on October 22, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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