Inflation data: The Consumer Price Index (CPI) for April increased by 0.1 percent, markedly lower than forecasters' projections for an increase of 0.6 percent, on average, and previous years' April CPI figures. The increase in most components of the CPI was relatively low. The surprise in the CPI derived primarily from increases in the housing and clothing and footwear components that were more moderate than expected, as well as from an unexpected decline in the food component, for which the rate of increase has slowed in recent months. The inflation rate over the preceding 12 months was 1.0 percent, the lower bound of the inflation target range, compared with 1.3 percent over the 12 months ending in March.
Inflation and interest rate forecasts: Following the publication of the April CPI figure, inflation expectations for the coming year, from all sources, declined. Private forecasters' projections for the next 12 CPI readings are 1.3 percent on average. Inflation expectations for the coming year derived from the capital market are 1.5 percent, and expectations for the next 12 CPI readings derived from banks' internal interest rates are 1.4 percent. Inflation expectations for medium and long terms remained slightly above the midpoint of the inflation target range, with a decline of about 10 basis points in the medium ranges. After the publication of the CPI data, there was an increase in the market's assessment of the probability of one interest rate reduction in the next three months, as reflected both in private forecasters' projections as well as the Telbor interest rate and makam curves.
Real economic activity: The range of data that became available this month leaves a lack of clarity about the state of real activity. According to the first estimate of National Accounts data for the first quarter (seasonally adjusted, annual terms), GDP grew by 2.1 percent, and business sector product grew by just 0.4 percent. The slowdown in growth was led by a contraction of 2 percent in private consumption, and a contraction of 9.8 percent in fixed capital formation (excluding ships and aircraft). In parallel, the estimated growth rate for the fourth quarter of 2013 was revised downward from 3.2 percent to 2.9 percent. It should be noted that the revision does not derive from a change in original data, but rather from a change in the seasonality coefficients, which are given to considerable subsequent volatility. Foreign trade data for April continue to indicate marked weakness in goods exports, which declined by 11 percent in April compared with March (monthly, seasonally adjusted data, excluding ships, aircraft and diamonds), and the trend of decline in its volume is strengthening. In contrast, services exports remained at an elevated level, and were 6.8 percent higher in the first quarter than in the fourth quarter (seasonally adjusted data, excluding startups). Trend data of goods imports continued to decline, with stability in consumer goods imports and a decline in the import of raw materials and capital goods. The Composite State of the Economy Index remained unchanged in April, with a decline in most of its components, most notably declines in goods exports, the import of manufacturing inputs, and in industrial production. Previous months' index readings were revised downward. In contrast, indices of consumer confidence and expectations of activity indicate a positive picture in April. The Consumer Confidence Index compiled by
The labor market: Labor market data indicate improvement during the first quarter, which is not in line with the first National Accounts estimate indicating a slowdown in activity.
Budget data: Since the beginning of 2014, the government's domestic deficit (excluding net credit) was
The foreign exchange market: From the monetary policy discussion on
The capital and money markets: From the monetary policy discussion on
The money supply: In the twelve months ending in April, the M1 monetary aggregate (cash held by the public and demand deposits) increased by 20.5 percent, and the M2 aggregate (M1 plus unindexed deposits of up to one year) increased by 8.3 percent.
Developments in the credit markets: Total outstanding debt of the business sector declined by about
The housing market: The housing component of the CPI (based on residential rents) increased by only 0.1 percent in April. In the 12 months ending in April, this component increased by 2.3 percent, compared with 3.2 percent over the 12 months ending in March. Home prices, which are measured in the
The global economy: Data which became available this month indicate that the global economy continues to recover, though apparently at a more moderate rate than previously assessed. This month, the OECD revised its 2014 global growth forecast downward by 0.2 percent, and the world trade forecast by 0.4 percent, with a slight upward revision of its 2015 projections. The US economy grew by only 0.1 percent in the first quarter, compared with the fourth quarter. Industrial production contracted by 0.6 percent in April. Personal consumption expenditure increased by 0.9 percent in March, and indicators from the credit market point to improved household economic security. A positive trend continued in the employment market, with a sharp increase of 288,000 in nonfarm payroll employment, and a decline in the unemployment rate to 6.3 percent. In the real estate market, there was a recovery in housing starts and in home prices, but in contrast there was a decline in demand for mortgages and in indices of contractor activity. Inflation surprised to the upside, but part of that is attributed to a drought in the first quarter which led to higher food prices. The Federal Reserve continues its tapering process as expected, and there is no change in the assessments that the federal funds rate will begin to be increased in the second half of 2015, after the Fed Chair noted that the labor market, despite its improvement, is far from satisfactory. In
The main considerations behind the decision
The decision to keep the interest rate for
The following are the main considerations underlying the decision:
* The CPI increased by only 0.1 percent in April, markedly lower than expectations, and the rate of inflation over the previous 12 months was 1 percent, the lower bound of the target range. This measure of the inflation rate is expected to decline in the coming months, to below the lower bound of the target range, though expectations for 1-year ahead are within the target range.
* Indicators of real economic activity which became available this month point to more moderate growth than assessed in the previous month, though the extent of the moderation is uncertain. The first estimate of first quarter data signals a slowdown in growth, due to a contraction of private consumption and fixed capital formation, while labor market data continue to indicate growth in employment and reduced unemployment, and there was improvement in indices of consumer confidence and of expectations of activity. Signs of moderation are also seen in Composite State of the Economy Index data, including goods exports.
* In the past month, the shekel weakened by 0.4 percent in terms of the nominal effective exchange rate, while since the beginning of 2014 the effective exchange rate has been stable, and it has appreciated by 4.4 percent over the past year.
* Against the background of disappointing first quarter growth data in the US and in
* Home prices continued to increase in February-March, and their annual rate of increase remains around 6-7 percent. The rate of mortgages taken out remains elevated, with continued decline in the risk characteristics of new mortgages. The increase in the number of building completions continues, but some slowdown is apparent in the number of building starts. This month, as well, there is continued uncertainty regarding the effect on housing market price levels and activity volume of the policy measures that the government decided upon.
The minutes of the monetary discussions prior to the interest rate decision for
The decision regarding the interest rate for
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