The Monetary Committee left the interest rate unchanged at 0.1%, and future guidance remained unchanged. The main message of the announcement and the press conference held by the Governor is that the relatively low inflation environment in Israel places the Committee in a significantly favorable position in terms of monetary policy, ie without pressure to change policy and in fact in a waiting position to examine developments in the world and inflation.
Thus, the committee noted in the announcement that the inflation environment has stabilized around the target center, but the more significant statement regarding inflation was of the governor at the press conference: “I want to be clear – we are different from countries with inflationary pressures and this is an important advantage of the Israeli economy.” Beyond that, the governor reiterated that inflation in Israel is among the lowest in the world, and in the bottom decile among OECD countries, under the influence of structural factors and a strong shekel. Looking ahead, these factors are expected to continue to support a moderate inflation environment, with the public sector wage agreement also expected to be a moderating factor. Also, with regard to the development of wages in the economy, the Bank estimates that so far the rise in wages is not unusual and consistent with the pre-crisis trend, which, as we recall, has not translated into significant inflationary pressures. The Research Department’s inflation forecast for 2022 is consistent with these estimates and remains unchanged at 1.6%, significantly lower than the inflation expectations environment derived from the bond market, while the Research Department estimates that the gap between expectations and forecasts reflects an inflationary risk premium.
In terms of reference to real activity, the tone was more positive, despite the higher uncertainty resulting from the spread of the omicron. This is mainly against the background of the rapid improvement recorded in the labor market in the last two months after prolonged shuffling. In terms of growth forecast, for 2021 it was reduced as expected from 7% to 6.5% for 2021, but remained unchanged for 2022, at a high rate of 5.5%, and it relies mainly on the continued closing of gaps in private consumption. In contrast, the reference to the global factor was mixed. The study’s assessment is based on a less positive contribution from global growth, and in addition the Committee noted the concern about the effects of morbidity and the transition in some countries to monetary restraint against the background of high inflation.
In terms of the exchange rate, a standard reference has been made, ie the mention of the slight changes in the shekel since the previous decision. In our opinion, this reference reflects the return to the policy of involvement of the “dynamic window”, relative comfort around current shekel levels, but low tolerance for further appreciation from current shekel levels.
In terms of the housing market, the tone of the announcement conveyed discomfort about the rapid rate of rise in housing prices. Past experience shows that similar statements were accompanied in a short period of time by measures to cool demand, and in our opinion the probability of taking these steps in the near future is relatively high.
Bottom line, the situation, and in particular the relatively low inflation environment for the world, allows the Bank of Israel to remain in a long waiting position to examine developments in the world and in the inflation environment. In our opinion, the more determined the Fed is in returning inflation to the target, the more moderate inflation of imported inflation will lead to, and thus the probability of an increase in the Bank of Israel interest rate will moderate.
***
It is clarified and emphasized that what is stated in this review does not constitute a substitute for advice that takes into account the data and the special needs of each person. In publishing the information in this review, there is no recommendation or opinion regarding the execution of any transaction or investment in securities, including the purchase and / or sale of securities. It should be emphasized that for any information of any kind that appears in the review – each person must perform additional testing and verification, taking into account his data and special needs. It should be noted that the information may contain errors and that market changes and / or other changes may apply to it, and that significant deviations may also be discovered between the forecasts and analyzes that appear in the actual situation. Therefore, making any decision based on a fact, opinion, opinion, forecast or analysis that appears in the review – is the sole responsibility of the reader.