(Source: Bank of Israel)

Inflation data: The Consumer Price Index (CPI) declined by 0.6 percent in January, more than forecasters’ projections, which were for a decline of 0.2 percent, on average. The surprise to the downside derived mainly from two components: food, which declined by 0.8 percent, and owned dwellings services, which declined by 0.9 percent. The fruit and vegetables component increased by 0.9 percent. The rate of inflation over the past 12 months was 1.4 percent, compared with 1.8 percent over the 12 months ending in December.
 
Inflation and interest rate forecasts: Private forecasters’ inflation projections for the next 12 CPI readings declined slightly after publication of the CPI reading for January, and average 1.6 percent. Inflation expectations derived from the capital market remain at 1.9 percent, and expectations for the next 12 CPI readings derived from banks’ internal interest rates remained at 1.4 percent. Inflation expectations for medium and long terms did not change markedly this month, and remain slightly above the midpoint of the inflation target range. Private forecasters’ projections, as well as data derived from the Telbor interest rates and the makam curve, indicate some probability of one reduction in the Bank of Israel interest rate in the coming three months. Over a range of one year, the probability of a reduction in the interest rate is lower, and some forecasters even expect one increase in the interest rate over that time.
 
Real economic activity: Data this month continue to indicate that the economy is growing at a moderate pace. According to the initial estimate of National Accounts data for the fourth quarter of 2013 (seasonally adjusted, annual terms), GDP increased by 2.3 percent and business sector product increased by 1.6 percent. With that, there was relatively high growth in the various uses, based in part on a marked decline in inventories and an increase in imports: private consumption increased by 3 percent, public consumption grew 3.1 percent, and investment in industries increased by 4.5 percent. Exports (excluding diamonds and start-up companies) increased by 61 percent, deriving mainly from volatile pharmaceuticals exports. Foreign trade data indicate that goods exports renewed their increase in January, after a temporary decline in December, primarily in high technology and medium-high technology industries, while there was a continued standstill in exports of low technology industries.

The increase in goods imports continued, primarily in raw materials and investment goods, which are likely to support an increase in the economy’s production capacity in the future. In December, there was also a recovery in business services exports (excluding start-up companies, seasonally adjusted). The Composite State of the Economy Index increased in January by 0.3 percent, the result of an increase in import, export, and industrial production data, even with a decline in the trade and services revenue indices. The Climate Index, based on the Business Tendency Survey of the Central Bureau of Statistics, increased by 0.26 percent in February, and indicates the possibility of some recovery in business sector activity. The Purchasing Managers Index for February also indicates improvement. There were no major changes in the consumer confidence indices compiled by the Central Bureau of Statistics and by Bank Hapoalim, and they continue to indicate pessimism among consumers.
 
The labor market: Labor Force Survey data for December indicate a decline of 0.6 percentage points in the employment rate among the principal working ages, after 3 months of increases, and a slight increase in the unemployment rate among this group, from 5 percent to 5.2 percent. The overall unemployment rate increased, from 5.6 percent to 5.8 percent.

Most of the moderate increase in the number of employee posts in the business sector over the past two years derived from an increase in employee posts held by non-Israeli workers, while the number of employee posts of Israelis did not increase over that time. Employee posts in the public services industries increased by 0.5 percent in September-November, compared with the previous 3-month period, and this was reflected primarily in nonprofit organizations and companies in the public service industries, and less so in the general government. Nominal wages increased by 0.1 percent, and real wages declined by 0.4 percent in September-November, compared with June-August. Net of non-Israeli workers, nominal wages increased by 0.5 percent, and real wages were unchanged.

Health tax receipts by the National Insurance Institute, which provide an indication of total wage payments in the economy, were 3.9 percent higher in December-January, on a nominal basis, than in the corresponding two months of the previous year, compared with a 6.1 percent year over year increase in October-November. The number of job vacancies increased to about 60,000 in January, after declining from 65,000 to 56,000 from the middle through the end of 2013. An expectation for a moderate increase in employment is also indicated in the Employers Survey by the Ministry of the Economy.
 
Budget data: In January, the government’s domestic surplus excluding credit was NIS 4.3 billion, similar to the average January surplus in the preceding 4 years, and slightly below the seasonal path consistent with the deficit ceiling for 2014. Domestic revenues were NIS 25 billion in January, about NIS 1.2 billion more than the seasonal path consistent with the tax revenues projected in the budget, resulting from one-time revenues. Domestic expenditure was about NIS 20.7 billion, about NIS 1.7 billion more than the seasonal path. Gross domestic VAT receipts increased by about 12 percent in real terms compared with January 2013, and excluding legislative changes the increase was about 5.2 percent.
 
The foreign exchange market: From the monetary policy discussion on January 26, 2014, through February 21, 2014, the shekel weakened by 0.8 percent against the dollar and by about 0.9 percent against the euro, while the dollar and euro weakened against most major currencies worldwide. The shekel weakened by about 1 percent in terms of the nominal effective exchange rate.

The housing market: Home prices, which are measured in the Central Bureau of Statistics survey of home prices but are not included in the CPI, increased sharply by 1.5 percent in November-December. Over the 12 months ending in December, prices increased by 8.1 percent, compared with an increase of 7.9 percent in the 12 months ended in November. In December, the number of transactions reached its highest level since 1997, and the share of investors in transactions stabilized at around 22 percent. With that, the Consumer Confidence Index published by the Central Bureau of Statistics indicates that there has been a decline in the intent to purchase a home, and there is a moderation in the decline in the stock of unsold homes. In the 12 months ending in November, there was a high level of about 43,800 building starts and about 42,200 building completions, and in light of the steps being taken by the government, it may be assessed that the increase in the stock of homes will continue.

The Bank of Israel has decided to reduce the interest rate for March 2014 by 0.25 percentage points, to 0.75 percent, consistent with the Bank's monetary policy intended to entrench the inflation rate within the price stability target of 1-3 percent a year over the next twelve months, and to support growth while maintaining financial stability. The future of the interest rate depends on developments in the inflation environment, growth in Israel and in the global economy, the monetary policies of major central banks, and developments in the exchange rate of the shekel.