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Bank of Israel warns: "Damage to the economy and the labor market is expected to be prolonged"
The Monetary Committee has decided to leave the interest rate at 0.1% at the Bank of Israel: "The rapid pace of the immunization process in Israel is increasing optimism regarding a rapid return of the economy to a path of growth in the coming year; however, the risks to activity are still high."
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Bank of Israel
Guy Ben Simon
Monday, February 22, 2021, 4:00 p.m.
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Governor of the Bank of Israel, Amir Yaron (Photo: Reuters)
The Monetary Committee of the Bank of Israel has decided to leave the interest rate unchanged at a low of 0.1%.
The decision is in line with the consensus of market economists' forecasts, while most of the factors that support the committee's decision have improved compared to the previous decision.
If in the past expectations of lowering interest rates have risen, then the good growth figures and the exit of the economy gradually from the third quarantine have removed this possibility from the table.
Among the factors supporting the decision were the good growth figures despite the second closure on the economy, with the local economy expanding in the fourth quarter by 6.3%, and by 2020 the economy contracted by only 2.4%.
On the face of it, this is relative growth for most OECD countries, and beyond the Bank of Israel's forecasts for a contraction of 3.7%.
However, among the factors that contributed to the growth were early vehicle purchases in order to save the green tax.
Neutralizing this effect, this is a growth of 2.7% in the quarter, and it should be taken into account that growth was also 'stolen' in 2019 thanks to an increase in the green tax in January 2020. In addition, growth data reflected a decline of more than 9% in private consumption due to economic closures. And exports of services fell by 4.1% despite strong growth in exports of high-tech services.
The parties who contributed to the decision also had data from the January index published last week, which reflected inflation of 0.4% in the last 12 months, compared with minus 0.7% in December.
Most of the deviation from the forecast is attributed to the housing item, which rose by 0.3%, although prices rose significantly in the other items as well, such as furniture and home equipment prices, which rose sharply by 0.8% - a result of rising world transportation prices.
Bank Poalim economists estimate that "the global inflation environment has risen and it is now permeating the local market as well. It is precisely the local factors, which are affected by the high unemployment rate, and in particular the housing section (NIS prices) that will moderate price increases slightly."
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Bank of Israel: "Damage to the economy and in particular the labor market is expected to be prolonged"
Against the background of the expanding policy and the global inflation environment, inflation expectations for the coming year from all sources have risen and are in the vicinity of the lower limit of the Bank of Israel's target.
"Expectations from the capital market for the first and second year have risen significantly," the Monetary Committee said in an interest rate announcement.
"Medium- and long-term expectations remain anchored within the target range."
Inflation expectations around the world continued to rise and even in Israel the market now expects inflation of about 1% for the next 12 months.
That is, the markets believe that inflation in 2022 will approach the center of the inflation target.
The rise in inflation expectations and the steepening of yield curves are a result of the very expansionary monetary policy of central banks.
The Bank of Israel is having difficulty curbing the process of rising yields, against the background of high financing needs of the Treasury, and rising expectations of inflation.
"Central banks are still more afraid of misleading too early a withdrawal from the expansionary policy, so in the coming months there will be no change in the policy instruments pursued," workers' economists wrote.
Although inflation expectations continued to climb against the background of rising commodity prices, this figure is still far from the Bank of Israel's target range, ranging from 3% to 1%.
Inflation in Israel is lower than in the US and even at the highest forecast is not expected to reach levels that will cause the Bank of Israel to think about rising interest rates. At the same time, the continuing decline in morbidity, combined with accelerating vaccination, brings the economy closer to the Bank of Israel's optimistic scenario. The
Bank of Israel emphasizes that "the rapid pace of the immunization process in Israel is increasing optimism regarding a rapid return of the economy to a path of growth in the coming year.
However, the risks to activity are still high - especially in light of the risk of further waves of disease due to the spread of the various mutations - and the damage to the economy and the labor market in particular is expected to be prolonged. " To about 13% in the period between the two closures.
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