| Dr. Gil Befman, Chief Economist of Leumi, and Yaniv Bar, Economist in the Economics Division |
| The Bank of Israel raised the interest rate by 40 basis points to 0.75%, the highest level since the beginning of 2014
The Monetary Committee of the Bank of Israel decided at its meeting on May 23, 2002, by 0.4 percentage points to a level of 0.75%, in accordance with Leumi’s forecast, with most consensus forecasts expecting a more moderate increase of 0.25%.
This is the highest rate increase since April 2011, and the highest interest rate level since the beginning of 2014.
The Bank of Israel’s reasons for raising interest rates include, among other things, the high level of economic activity in the Israeli economy; The labor market continues to be tight and close to full employment, with most industries continuing to point to a shortage of workers as a factor limiting their day-to-day operations.
The trend of rising housing prices that continues to accelerate, the war in Ukraine and the slowdown in manufacturing activity in China that contribute to the rise in imported inflation, which is above the upper limit of Israel’s price stability target (1% -3%), and inflation expectations for the coming year. Although, long-term expectations continue to be anchored within the target range.
The Bank of Israel notes in its announcement that there will be a significant decline in local economic risk due to the continued waves of corona morbidity, at least in the short term.
However, there is concern about some negative impact on economic activity due to developments in the world, in particular the war in Ukraine and the slowdown in manufacturing activity in China.
According to the announcement, the indicators of economic activity in the economy continue to indicate a level of activity close to potential and the impact of the epidemic on the economy has diminished significantly.
Ramat continues to stay in the vicinity of the trend line that was pre-crisis. This is a situation in which the Bank of Israel estimates that the Israeli economy is able to bear the burden of raising interest rates, in order to deal with the acceleration relatively quickly.
The Bank of Israel also warns about the issue of inflation in housing prices, which continues to accelerate to a significantly higher rate compared with that of recent years. Alongside these, the annual rate of increase in rental prices (in renewable contracts) is still relatively low and stands at 3.2%.
In conclusion, the interest rate announcement states that “the Israeli economy is experiencing strong economic activity, accompanied by a tight labor market while rising in the inflation environment. Therefore, the committee decided to continue the gradual process of raising interest rates.
The rate of interest rate increase will be determined in accordance with the activity data and the development of inflation, in order to continue to support the achievement of the policy objectives. “
The Bank of Israel notes the ongoing monetary tightening in the world, and it seems that it will also use these developments as a backbone to continue the process of raising interest rates in Israel.
It seems that the Bank of Israel will strive to return its interest rate level to a “neutral” and even “reducing” level, which means an increase in interest rates in real terms from the current negative level to a level that is around zero at least and even to a positive level.
In this context, we expect the Bank of Israel to continue to raise interest rates in decisions close to 1.75% at the end of 2022 and 2.00% during the first quarter of 2023.
| The unemployment rate continued to decline in April, along with a continued rise in the number of job vacancies in the economy
Data continue to indicate a tight labor market in Israel, according to data from the Central Bureau of Statistics (CBS).
The unemployment rate (aged 15 and over) in its standard definition, which includes the extent of the unemployed only, fell in April to 3.5% compared to 3.8% in March and 5.4% in April 2021 (seasonally adjusted data).
In addition, the current level of unemployment is close to the level that was on the eve of the outbreak of the corona crisis – 3.4% in February 2020.
It should be noted that widespread unemployment (ie unemployed, employed persons who were temporarily absent all week and workers who stopped working due to dismissal or closure of the workplace from March 2020, most of them, probably as a result of the crisis) continued to fall in April and stood at 4.7% (original data).
Of this, the volume of “corona unemployed” (the difference between unemployment in the broad definition compared to the standard definition) was 1.6%, which is about 69.5 thousand.
Also, the adjusted employment rate (excluding employed persons who were temporarily absent from work for Corona-related reasons) decreased slightly and is still about 1 percentage point lower than its level on the eve of the crisis. Overall, it should be emphasized that the totality of the data indicates a significant improvement in the employment data of the economy.
There was a slight decrease in the number of employed persons in April compared to March, but compared with April 2021 there was an increase of about 235,000 employed persons (seasonally adjusted), which reflects an increase of about 6%.
Among the industries in which the number of employed persons increased at the highest rate, it is possible to note: accommodation and food services, as well as transportation services, against the background of the increase in industry activity after the removal of the corona restrictions; Information and communication, thanks to the accelerated growth in the activity of high-tech industries in the past year; And construction, against the background of the increase in the volume of construction starts during the year 2021.
Simultaneously with the increase in the number of employed persons, the demand for workers in the economy continues to grow. The number of job vacancies in the economy rose to about 154,000 in April, compared with about 152,000 in March and about 128,000 in April 2021 (seasonally adjusted data).
This is a significantly high level compared to the one before the Corona crisis (95-100 thousand job vacancies), which may lead to the development of more significant wage pressures later on and the acceleration of inflation.
In this context, it should be noted that the Bank of Israel’s interest rate announcement states that “so far, the overall wage increase rate according to the index has been adjusted, the change in composition is close to the pre-crisis trend. In the public sector, it is rising at a more moderate rate. “
In conclusion, the improvement in employment data continues, which reflects the continued resilience of the local labor market. A development that supports the continued process of raising interest rates by the Bank of Israel.
| The basic trade deficit continued to widen in April as well, amid a faster increase in imports than in exports of goods
In April, Israel’s goods totaled about $ 5.1 billion (seasonally adjusted data, excluding ships, aircraft and diamonds). This figure reflects an increase of about 3.0% compared to the volume of exports in March and an increase of about 26.7% (in nominal dollar terms) compared to April 2021.
Exports of pharmaceuticals stood out positively in April, as did exports of metals and chemicals. On the other hand, a relatively sharp decline was recorded in the export of electronic components.
Commodities in April totaled about $ 7.6 billion (excluding ships, planes, diamonds and energy materials). This is an increase of about 8.1% compared to imports in March and an increase of about 26.3% compared to the volume of imports in April last year.
The increase in imports is a result of an increase in the volume of imports of consumer goods and investment in April, mainly against the background of a relatively sharp increase in imports of vehicles.
On the other hand, a moderate decline was recorded in the import of raw materials, although, it remained at a high level. The high level of imports since the beginning of the year is an indication of the continued expansion of economic activity in the economy in the coming months.
However, it should be noted that the monthly foreign trade data are not deducted from price changes, so apparently the increase also partly reflects the effect of the global rise in prices that occurred mainly in raw materials and intermediate inputs, and does not only reflect quantitative growth.
In summary, the faster growth in imports of goods compared to exports led to a widening of the deficit in the basic trading account (excluding ships, aircraft, diamonds and fuel) in April, which stood at about $ 2.6 billion compared to about $ 2.1 billion in March.
Since the beginning of the year (January-April), the average has been about $ 2.5 billion, a slightly higher monthly rate than in 2021.
In light of the above, and assuming that the current pace is maintained by the end of the year, it appears that 2022 will amount to a record volume of deficit in the economy’s commodities account. This development has a moderating effect on the growth rate of the domestic product as well as on the current account surplus of the balance of payments.
In light of the above, we estimate that 2022 is expected to amount to a surplus of about 3.2% of GDP in the current account compared to 4.7% of GDP in 2021, but the surplus is expected to increase, in our estimation, to about 4% of GDP in subsequent years.
The writer is the chief economist of Bank Leumi. The data, information, opinions and forecasts in the review are provided as a service to readers, and do not necessarily reflect the official position of the Bank. They should not be construed as a recommendation or substitute for the reader’s independent discretion, or an offer or invitation to receive offers, or advice to purchase and / or make any investments and / or actions or transactions. Errors may occur in the information and changes may occur. The Bank and / or its subsidiaries and / or companies related to it and / or the controlling shareholders and / or stakeholders in which of them may from time to time have an interest in the information presented in the review, including financial assets presented in it.