The Bank of Israel (BOI), which has maintained its rate since cutting to the current level in March 2015, also trimmed its 2017 forecasts for growth and inflation but raised the 2018 growth forecast.
"The Monetary Committee intends to maintain the accommodative policy as long as necessary in order to entrench the inflation environment within the target range," the BOI said, changing its previous guidance of keeping its monetary policy "accommodative for a considerable time."
Referring to the updated economic forecast by its staff, the BOI pointed to higher rates from the second quarter of next year, a change to its last statement from February statement when it said there was a high probability the BOI would raise its rate to 0.25 percent "within about a year," based on forecasters' assessments and yields in bond markets.
"The monetary interest rate is expected to remain at its current level of 0.1 percent throughout the coming year and to increase gradually from the second quarter of 2018," the BOI said today.
BOI staff forecast the interest rate would end this year at an unchanged 0.10 percent, down from its earlier forecast of 0.25 percent, and then end 2018 at 0.50 percent, the same as earlier forecast.Gross Domestic Product is expected to grow this year by 2.8 percent, down from 3.2 percent previously forecast as vehicle purchases for this year were pulled forward to 2016 due to an increase in taxes in January. Fourth quarter 2016 GDP rose by an annual rate of 4.8 percent.
In 2018 GDP is seen rising 3.3 percent, up from the previous forecast of 3.1 percent as fixed capital formation surges 9.0 percent, up from 3.0 percent previously expected.
Inflation is expected to be 0.7 percent in the coming year that ends in the first quarter of 2018 and then converge to the bank's target of 1 - 3 percent by the second quarter of 2018.
In the final quarter of the 2018 year the average inflation rate is seen at 0.50 percent as compared with the final quarter of 2017.
After battling with deflation since September 2014, Israel's inflation rate has been rising and rose to 0.4 percent in February - the highest rate since July 2014 - from 0.1 percent in January, helped by higher energy prices, wages and a general rise in global inflation.
"However, enhanced competition in the economy is delaying the return of inflation to the target, and in recent months, there was also the impact of the sharp appreciation of the shekel," the BOI said, adding this rise in the exchange rate had also pushed down inflation expectations.
But unlike its previous statement, when the BOI said the exchange rate was weighing on the export of goods, today's statement merely noted the "rapid appreciation" of the shekel.
The shekel has been rising sharply this year following a more gradual rise from March 2015. The shekel was trading at 3.65 to the U.S. dollar today, up 5.5 percent this year and up 6.6 percent since the start of 2016.
The Bank of Israel released the following statement:
"The Monetary Committee decides on April 6, 2017 to keep the interest rate unchanged at 0.1 percent
· The trend of moderate increase in annual inflation continues, affected primarily by the change in the trend in energy prices. However, the shekel’s appreciation is expected to defer the return of inflation to the target, and has also led to a decline in short-term inflation expectations. Medium term (forward) inflation expectations are anchored within the target range, and longer-term expectations are around the midpoint of the target range.
· Based on indicators of real economic activity, it may be assessed that net of the atypical effect of vehicle imports, the economy continued to grow in the first quarter of 2017 by a rate similar to that in recent quarters. The labor market continues to convey a very positive picture and is near full employment.
· The state of real economic activity worldwide is mostly positive, though there is continued uncertainty regarding political processes and their economic ramifications. In the US, the federal funds target rate was increased, and two more increases are expected this year; in Europe, accommodative policy continues.
· In recent months there has been a rapid appreciation in terms of the effective exchange rate.
· There are signs of the housing market cooling off, but it is too early to conclude that the trend of increases has halted.
The Monetary Committee intends to maintain the accommodative policy as long as necessary in order to entrench the inflation environment within the target range. The Bank of Israel continues to monitor developments in inflation, the real economy, financial markets, and the global economy, and will act to attain the monetary policy targets in accordance with such developments.
In the past year, the annual inflation rate has been increasing moderately, and over the 12 months ending in February the inflation rate was 0.4 percent (Figure 1 in the data file). This is the highest rate of inflation since July 2014, but inflation remains below the target range. The increase in inflation was supported by the accommodative monetary policy, the increase in energy prices in the past year, the rise in inflation worldwide, and the wage increases in the economy. However, enhanced competition in the economy is delaying the return of inflation to the target, and in recent months, there was also the impact of the sharp appreciation of the shekel. The appreciation led to a relatively sharp decline in short-term inflation expectations (Figure 3). There was some decline in medium-term and long-term expectations as well, but medium-term forward inflation expectations are anchored within the target range, and longer term expectations are around the midpoint of the target (Figure 4).
In the housing market, the decline in the rate of new mortgages granted continues, against the background of the increase in mortgage interest rates, and the decline in the number of transactions continues as well. Data on building starts indicate that supply continues to expand. However, despite the previous two observations pointing to some stability in home prices, it is too early to conclude that the upward trend has halted.
Based on indicators of real economic activity in the first quarter, it may be assessed that net of the effect of volatility in vehicle imports, the economy continued to grow by a rate similar to that of recent months. This is seen in the initial findings of the Companies Survey (Figure 10), from the Purchasing Managers Index indicating expansion for several months, and from the Composite State of the Economy Index. Foreign trade data have been relatively volatile since the beginning of the year, against the background of fluctuations in vehicle imports and pharmaceutical exports. The development of exports in recent months indicates that the virtual standstill in goods exports has continued while services exports continue to grow. The improvement in world trade is expected to support exports, but the rapid appreciation of the shekel is expected to weigh on them. Labor market indicators continue to portray its strength (Figure 13)—employment is increasing, with a continued rise in wages, and the number of job vacancies is elevated.
The state of global economic activity portrayed by recent indicators is mostly positive, though there is continued uncertainty regarding political processes and their economic ramifications. Growth forecasts for some advanced economies were revised slightly upward, there was improvement in the rate of world trade growth (Figure 16), and sentiment indices remain elevated. In the US, positive data were published regarding the labor market, personal consumption, the industrial sector, and the real estate industry, and core inflation indices are around the target. The Federal Reserve raised the federal funds target rate, and is expected to raise it twice more over the course of the year. In Europe as well, data were positive with regard to employment, manufacturing, sales and expectations of future activity. However, core inflation remains relatively low and accommodative monetary policy continues. Purchasing managers indices in emerging markets pointed to optimism regarding the development of economic activity, though growth forecasts for some were reduced. Data on economic activity published in China indicated stable growth. Energy prices declined in the past month against the background of increased supply, but the decline did not offset the upward trend of the past year.
Based on the Research Department’s updated macroeconomic forecast, GDP is expected to grow by 2.8 percent in 2017 (although the growth rate net of the effect of fluctuations in vehicle imports is expected to be higher) and by 3.3 percent in 2018. Inflation is expected to be 0.7 percent in the coming year (ending in the first quarter of 2018), and to converge to within the target range in the second quarter of 2018. The monetary interest rate is expected to remain at its current level of 0.1 percent throughout the coming year and to increase gradually from the second quarter of 2018.
The minutes of the monetary discussions prior to this interest rate decision will be published on April 20, 2017.
The next decision regarding the interest rate will be published at 16:00 on Monday, May 29, 2017."