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Roll of 100 Israeli Shekel bills

The Monetary Policy Report for the first half of 2019 was published on Thursday, reviewing the monetary policy through the beginning of the second half of 2019. The Monetary Committee kept the interest rate unchanged, after increasing it to 0.25 percent at the end of the previous half-year, assuring that the rising path of the interest rate 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.

During the course of the half-year reviewed, the marked uncertainty in the fiscal sphere was discussed, among other things in view of the general elections that were held during the period: this derived from the possible ramifications of the coalition-forming negotiations, from the steps that the future government might take in order to deal with the expected deficit and from their possible effects on economic activity and on the inflationary path. In any case, the fiscal uncertainty is expected, in the Committee’s assessment, to continue for some time.


In the period reviewed, the Bank of Israel bought only a small amount of foreign exchange—$86 million, compared to billions of dollars it purchased in previous years. As a result of this and other factors, the shekel strengthened markedly against major currencies, after it had depreciated in the fourth quarter of 2018. From the beginning of the half-year, the shekel strengthened in terms of the nominal effective exchange rate, the dollar, and the euro; it appreciated by 5.4% in nominal effective exchange rate terms.

The Committee members noted that the appreciation is the main factor delaying the continued increase of the inflation rate toward the midpoint of the target.

The data on real activity published during the reviewed period supported the assessment that activity is converging to growth at a pace slightly lower than its potential of approximately 3 percent, and that data on the previous half-year indicated a transitory slowing in the second and third quarters of 2018 that derived from supply constraints. This assessment is supported mainly by the tight labor market and the continued increase in wages, primarily in the business sector.

Data published toward the end of the period reviewed indicated an increase in home prices of 1 percent in the past 12 months, following a year over year decline of more than 2 percent in some months of the previous half-year. This is in parallel to the marked increase in the number of transactions.

Despite the increase in home prices, the Committee members agreed that it is still too early to assess if the trend of rising prices is renewing or if their decline will continue. There has been a continued moderate rising trend in new mortgage volume since the end of 2017, against the background of a slight decline in the weighted real interest rate on mortgages, which started in the beginning of 2019.

Based on the forecast compiled by the Research Department and published with the interest rate decision on July 8, 2019, GDP is expected to grow by 3.1 percent in 2019 and by 3.5 percent in 2020, a downward revision of 0.3 percentage points for 2019 (compared with the forecast compiled in January 2019).

Inflation is expected to be 1.6% in 2019 (an upward revision of 0.3 percentage points for 2019 vis-à-vis the forecast in January) and 1.6 percent in 2020 (a downward revision of 0.2 percentage points for 2020 vis-à-vis the forecast in January). According to the forecast, the Bank of Israel interest rate is expected to increase to 0.5% toward the end of the third quarter of 2019 and to continue to increase gradually to 1% by the end of 2020 (a downward revision of 0.25 percentage points for 2020, compared with the forecast compiled in January 2019).


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