The Bank of Israel (BOI), which has maintained its rate since cutting it to the current level in March 2015, also confirmed its recent view that the risks of reaching its inflation target "remain high" but higher wages and global inflation are expected to help inflation return to the target of 1-3 percent.
Last week the BOI said in its monetary policy report for the second half of 2016 that its monetary policy committee (MPC) had stopped considering the use of unconventional monetary policy tools, such as negative interest rates or bond purchases, in light of unexpectedly strong economic growth, a strong labour market and rising inflation expectations.
BOI staff are forecasting an unchanged policy rate until the fourth quarter of this year when the rate would be increased by 15 basis points following another 25 point hike to 0.5 percent in 2018.
Israel's inflation rate turned positive in January for the first time since July 2014 as inflation rose to 0.1 percent from minus 0.2 percent due to higher food and housing prices.
Economic activity in Israel is also continuing to improve with Gross Domestic Product up by an annual 3.8 percent in the fourth quarter of 2016, up from 3.6 percent in the third quarter, though the BOI said growth was boosted by "an atypical" increase in vehicle imports.
Net of this increase, it assessed growth slightly above 3 percent, with exports growing strongly while private consumption had moderated "markedly."
Economists are forecasting growth of 3.2 to 3.5 percent this year from 4 percent last year.
The exchange rate of Israel's shekel has risen by 3 percent against the U.S. dollar since the previous MPC meeting on Jan. 22 through Feb. 24, the BOI said, adding that the "level of the effective exchange rate continues to weigh on the developments of goods exports."
The Bank of Israel issued the following statement with the main considerations underlying its decision:
"The decision to keep the interest rate unchanged at 0.1 percent is consistent with the Bank of Israel's monetary policy, which is intended to return the inflation rate to within the price stability target range of 1–3 percent a year, and to support growth while maintaining financial stability. The Monetary Committee continues to assess that in view of the inflation environment, and of developments in the global economy, in the exchange rate, as well as in monetary policies of major central banks, monetary policy will remain accommodative for a considerable time.
Following are the main considerations underlying the decision:
· " The CPI for January declined by 0.2 percent, in line with expectations. The trend of moderate increase in annual inflation continues, impacted primarily by a change in the trend of energy prices and by the dissipating of the direct effect of administrative price reductions, and the year over year inflation rate is 0.1 percent. Short-term inflation expectations are below the target, but forward expectations for medium terms, from the third year onward, are within the target range, and longer term expectations are anchored near the midpoint of the target range.
· Real economic activity continues to improve. According to the initial estimate, GDP growth in the fourth quarter of 2016 was particularly high, impacted by an atypical increase in vehicle imports. Net of this increase, it may be assessed that the growth rate was slightly above 3 percent, with a change in the composition of uses—the growth rate of private current consumption moderated markedly, while there was strong growth of exports. The picture conveyed by the labor market remains very positive.
· In the global economy, moderate growth continues in major advanced economies, with a continued trend of improvement in emerging markets. Positive momentum continues in financial markets, although the uncertainty regarding political developments continues to be a source of risk to continued growth. Inflation in most markets is approaching its target, but in Europe and Japan very accommodative monetary policy continues. Market assessments are that the federal funds rate will be increased twice in 2017.
· From the monetary policy discussion on January 22, 2017, through February 24, 2017, the shekel strengthened by 3.0 percent against the dollar, and it appreciated by 2.1 percent in terms of the nominal effective exchange rate. The shekel has appreciated by 7.4 percent over the past 12 months in terms of the nominal effective exchange rate. The level of the effective exchange rate continues to weigh on the development of goods exports.
· There was a sharp decline in home prices in the most recent data, in parallel with a decline in the number of transactions. These figures are consistent with the decline in monthly mortgage volume, the increase in mortgage interest rates, and efforts to increase supply. However, it is too early to assess, based on a single figure, if the trend in home prices is changing.
The Monetary Committee is of the opinion that the risks to achieving the inflation target remain high, yet the increases in wages and in global inflation are expected to support the return of inflation to the target. The Bank of Israel will continue to monitor developments in the Israeli and global economies and in financial markets. The Bank will use the tools available to it to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, and in this regard will continue to keep a close watch on developments in the asset markets, including the housing market."
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