The Bank of Israel’s Monetary Committee has assessed that the rising path of interest rates in the future will be gradual and cautious, in a manner that supports a process at the end of which inflation will stabilize around the midpoint of the target range, and that supports economic activity.
The inflation rate has stabilized above the lower bound of the target range, notwithstanding the slightly lower than expected decline of 0.3% in the consumer price index (CPI) for November. In the past six months, the annual inflation rate has ranged between 1.2% and 1.4%. In the coming months, inflation is expected to range around the lower bound of the target.
The Research Department forecasts inflation of 1.3% over the coming four quarters. Medium-term expectations remained entrenched within the target range. Continued wage increases and the economy being around full employment will support a continued rise in inflation toward the midpoint of the target range, as will the depreciation, to the extent it persists.
An analysis of recent data and of updated indicators of economic activity continues to support the assessment that the economy is converging to its potential growth rate, despite the low growth in the second and third quarters. The tight labor market supports this assessment, as does the growth of imports and the widening of the trade deficit. Indicators of fourth quarter activity point to some acceleration in the growth rate.
The global macroeconomic picture continues to convey a slowing of momentum, high volatility, and lack of certainty. The US economy remains robust, though the risks due to the worsening “trade war” and the slowing in Europe continue to weigh on momentum. There were price declines and sharp volatility in most equity indices, and expected monetary contraction worldwide is seen to be slowing.
Since the increase in the interest rate, the nominal effective exchange rate has been relatively stable, after the shekel depreciated in the preceding weeks.
The Bank of Israel continues to monitor developments in inflation, the real economy, the financial markets, and the global economy, and will act to attain the monetary policy targets in accordance with such developments.