In a sign that Israel’s economy is doing all right, the Bank of Israel BOI has chosen not to change the interest rate from 0.1%. If the BOI had felt that the continued Coronavirus crisis was harming the economy, then it might have chosen to lower rates. At the same time, by not raising the rate the BOI is signaling that it does not see the economy as having fully recovered from the now 2 yearlong crisis.
To help a stalled economy get out of recession a central bank will cut rates to help stimulate business growth. When there is high inflation, the bank will do the opposite since raising rates helps to cool off an overheated economy by tightening up the money supply.
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Israel is currently in an awkward position with its currency, the New Israeli Shekel, setting record highs against the world’s convertible currencies such as the Dollar and the Euro. While this is good for the local consumer as it makes imports cheaper, it harms the growth of new businesses as investments from abroad do not go as far.
Also, Israelis are now seeing a jump in inflation. This is, in part, related to the current worldwide supply chain problems. However, Israeli feel that the high Shekel should have offset the increases in the price of imports in Dollars or Euros.
The BOI explained its decision saying that in Israel economic activity continues apace, and labor market data for November and the first half of December indicate an improvement in the employment indices.
However, the increase in the morbidity rate and in the infection coefficient due to the “Omicron” variant, increases the risk to activity and may have macroeconomic significance in accordance with their scope. These developments are leading to an increase in uncertainty regarding the intensity of economic activity in the short and medium term.
Inflation in Israel stabilized around the midpoint of the target range. The CPI for November declined by 0.1 percent. Inflation in the past 12 months was 2.4 percent. Inflation expectations for the coming year and for the medium and long terms are within the target range.
Since the previous interest rate decision, there has been increased volatility in the exchange rate. At the end of the period, the shekel had weakened by 0.7 percent against the US dollar, by 1 percent against the euro, and by 0.2 percent in terms of the nominal effective exchange rate.
Economic activity continues apace. Labor market data for November and the first half of December indicate a marked improvement in the employment indices.
The Research Department at the BOI revised its macroeconomic staff forecast. Its assessment is that GDP will grow by 5.5 percent in 2022, and by 5 percent in 2023.
Home prices increased by 10.3 percent in the past 12 months, a significantly higher rate than in recent years.
The global economy continued its trend of recovery during the reviewed period, but there was an increase in uncertainty in view of the spread of the “Omicron” variant, which may cause difficulties in the production and supply chains. In most countries, the inflation indices have increased to levels higher than their central bank targets, and monetary tightening around the world continues.
The Israeli economy’s process of recovery from the crisis continues. However, there are still challenges to economic activity. The Committee will therefore continue to conduct an accommodative monetary policy for a prolonged time, in accordance with the pace of growth, employment, and the path of inflation. This is in order to continue supporting the attainment of the policy targets and the economic recovery from the crisis, and to ensure the continued orderly functioning of the financial markets.
The BOI also pointed out that the ongoing economic activity in Israel continues to expand alongside the COVID-19 pandemic and the cyclical nature of the waves of morbidity. This has been possible, in part, thanks to the adaptation of most industries to functioning alongside the pandemic. However, the increase in the morbidity rate and in the infection coefficient due to the “Omicron” variant increase the risk to activity and may have macroeconomic significance in accordance with their scope. These developments are leading to an increase in uncertainty regarding the intensity of economic activity in the short and medium term.
