Israel’s central bank left its monetary policy interest rate at 0.10 percent, as widely expected, saying all data point to continued solid economic growth in the second quarter of this year and growth for the full year will be higher than previously forecast.
The Bank of Israel (BOI), which has kept its rate steady since March 2015, said overall exports remained sluggish apart from rapid growth in the export of services against the background of a continued appreciation of the shekel and an improvement in world trade.
Israel’s Gross Domestic Product slowed to annual growth of 3.8 percent in the first quarter of this year, down from a pace of 4.6 percent in the previous two quarters.
But BOI staff raised its growth forecast for this year to 3.4 percent from its previous forecast of 2.8 percent, as exports and investments had risen more than expected, with exports expected to continue to improve due to the expected recovery in world trade.
Although growth this year is slower than 2016’s 4.0 percent, data toward the end of last year was affected by vehicle purchases being brought forward due to changes in taxes in January 2017 so the BOI said growth in 2017 will in fact be similar to that in 2016.
For 2018 the BOI retained its growth forecast of 3.3 percent as growth continues to transition to rely more on exports than private consumption. Further changes to vehicle taxes are expected in January 2019 which again is expected to lead purchases being pulled forward, raising 2018 growth.
Israel’s inflation rate rose slightly to 0.8 percent in May from 0.7 percent, slightly below the BOI’s target range of 1-3 percent, with inflation expected to decline in coming months due to lower water and fuel prices, and a reduction in the prices of after-school childcare.
The appreciation of the shekel is also keeping the cost of imported items down. One-year and three-year inflation expectations remain below the BOI’s target tough longer-term expectations are within the target, the central bank said.
BOI forecast annual inflation in the second quarter of 2018 at 0.8 percent and 1.5 percent for the year, down about 0.2 percentage points from previous forecast due to lower oil prices.
The bank’s forecast for the BOI policy rate was unchanged from April, with the rate remaining at the current level in the coming year before being raised in the second quarter of 2018 to 0.25 percent following a number of quarters when inflation is expected to exceed 1.0 percent and one-year inflation expectations move closer to the central of the target range.
A second rate hike is then seen in the fourth quarter of 2018 when the rate is increased to 0.5 percent.
Israel’s shekel has been firming sharply this year though it fell in the last week. Today it was quoted at 3.55 to the U.S. dollar, up 8.4 percent this year.
The Bank of Israel issued the following statement:
- The annual inflation rate is slightly below the target, but the inflation environment remains low: inflation expectations for up to the third year remain below the target range. The increase in nominal wages, the strong economic environment, and inflation worldwide will act to increase the inflation rate, while the appreciation that has occurred in the shekel, increased competition in the economy and measures adopted by the government to reduce the cost of living will act in the opposite direction.
- Indicators of activity point to continued economic growth at a solid pace in the second quarter as well, and the labor market remains strong. Over time, growth of exports has been based on growth of services exports, while goods exports have essentially stood still.
- The global economy continues its moderate improvement, and there is an increase in the growth rate of world trade. In Europe, the recovery is becoming entrenched, and political risk has declined. The Federal Reserve increased the federal funds rate, as expected, but central banks of other major economies are continuing the very accommodative policy for now.
- Since the last monetary discussion, there were relatively sharp changes in cross rates and the effective exchange rate appreciated by less than one percent. In the past 12 months, the effective exchange rate strengthened by 9.4 percent.
- Stability in home prices has been apparent for the past several months, and housing market indicators continue to point to the market cooling off.