The Bank of Israel has decided to leave its interest rate unchanged at 0.1% for a further month. Among the reasons the bank's Monetary Committee gave for the decision was that while inflation in Israel is close to the middle of the government's 1-3% price stability target range, inflation expectations for up to three years remain below the target range. The committee also notes that indicators of economic activity point to continued growth at a solid pace in the second quarter, and that the labor market remains strong.
On home prices, the committee says that they have been stable for the past several months, and housing market indicators continue to point to the market cooling off.
In the estimates presented to the committee, the Bank of Israel Research Department projects growth in GDP of 3.4% in 2017 and 3.3% in 2018. The 2017 projection is up from the previous projection of 2.8%, mainly because of rapid export-led growth in the first half of the year. The Research Department sees further growth in exports, mainly because of improvement in world trade generally.
On the other hand, private consumption is expected to weaken. "Essentially, the forecast reflects a gradual transition to growth based less on private consumption and more on exports," the Research Department said, "It should be noted that the development of the real economic variables in recent quarters was influenced by vehicle purchases being brought forward due to changes in vehicle taxation that took effect in January 2017… Further changes in vehicle taxation are expected in January 2019, and our assessment is that they will also lead to purchases being brought forward, which will increase the growth rate in 2018."
The rate of inflation over the next year (ending in the second quarter of 2018) is expected to be 0.8%. The Bank of Israel interest rate is expected to remain at its current level of 0.1% until the first quarter of 2018, and to increase gradually from the second quarter of 2018.
In the press conference following the interest rate announcement, Governor of the Bank of Israel Karnit Flug commented on, among other things, exchange rate policy. "After the sharp appreciation in the effective exchange rate over the first few months of the year, the pace of the appreciation moderated: over the past three months, in which the Bank of Israel purchased approximately $3 billion in foreign exchange, there was a nominal effective exchange rate appreciation of one percent, with a relatively sharp change in cross exchange rates-the shekel appreciated against the dollar during this period by more than 3 percent, but weakened against the euro by about 3.5 percent," Flug said.
"As we have said in the past, the level of the exchange rate partly reflects the relatively good state of Israel’s economy, reflected in, for example, the current account surplus and relatively high growth," Flug continued, "However, in our assessment as well as that of other entities in the market, the shekel is overvalued, a result of the very accommodative policy that some central banks are adopting. The level of the exchange rate weighs on exports, with an emphasis on manufacturing and on the tradable industries in general. Over time, in order to support these industries, the government should adopt policy measures that will increase productivity: improve the business environment, improve human capital, and increase the investment in infrastructure (which in itself, as we showed in the Bank of Israel Annual Report, can contribute to a depreciation in the exchange rate).
"The continued monetary contraction in the US, and a change in the trend of very accommodative monetary policy in Europe and in other economies, when it occurs, will on their own serve as a force for the weakening of the shekel. However, the Monetary Committee will act in the foreign exchange market as long as monetary-policy needs warrant it."
Published by Globes [online], Israel business news - www.globes-online.com - on July 10, 2017
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