The decision to keep the interest rate for November 2016 unchanged at 0.1 percent is consistent with the Bank of Israel's monetary policy, which is intended to return the inflation rate to within the price stability target range of 1–3 percent a year, and to support growth while maintaining financial stability. The Monetary Committee continues to assess that in view of the inflation environment, and of developments in the global economy, in the exchange rate, as well as in monetary policies of major central banks, monetary policy will remain accommodative for a considerable time.
Following are the main considerations underlying the decision:
· The CPI for September declined by 0.1 percent, a rate in accordance with expectations and that is in line with the seasonal path consistent with achieving the inflation target. Inflation as measured by the change in the CPI over the past 12 months remains negative, but the effects of the decline in energy components and of initiated price reductions are contracting. Short-term inflation expectations remained stable this month, below the lower bound of the inflation target range. Medium-term and long-term expectations remain anchored within the target range.
· The picture of real economic activity remains positive, with second quarter growth driven by growth in all uses. Companies Survey data point to the assessment that growth in activity is expected to have continued in the third quarter as well. The picture conveyed by labor market data remains positive, with growth in employment and in wages; the Companies Survey indicates that in various industries, companies are reporting hiring constraints.
· The global economy continues to grow at a slow pace. The IMF kept its global growth forecast unchanged, though the forecast for world trade growth was revised downward and is likely to be affected by political developments in some advanced economies. Central banks continue to conduct very accommodative monetary policy. The probability of a 0.25 percentage point increase in the US federal funds rate by the end of the year is relatively high, though the pace of the expected interest rate increases afterward is expected to be slow.
· From the monetary policy discussion on September 25, 2016, through October 26, 2016, the shekel weakened by 2.2 percent against the dollar, and depreciated by 0.5 percent in terms of the nominal effective exchange rate. The shekel has appreciated by 3.4 percent over the past 12 months in terms of the nominal effective exchange rate. The level of the effective exchange rate continues to weigh on the growth of exports and of the tradable sector.
· Home prices continue to rise, and previous months’ indices were revised upward. Alongside this, the increase in the stock of unsold new homes continues. Monthly mortgage volume is stabilizing, with a continued increase in mortgage interest rates.
The Monetary Committee is of the opinion that the risks to achieving the inflation target remain high. The Bank of Israel will continue to monitor developments in the Israeli and global economies and in financial markets. The Bank will use the tools available to it and will examine the need to use various tools to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, and in this regard will continue to keep a close watch on developments in the asset markets, including the housing market.