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Bank of Israel holds benchmark rate at 0.1% as pandemic casts pall

News about vaccine is positive but it is unclear when doses will reach Israel; until then, ‘morbidity is expected to continue affecting economic activity,’ central bank says

Shoshanna Solomon is The Times of Israel's Startups and Business reporter

Governor of the Bank of Israel Amir Yaron attends a press conference on March 31, 2019. (Yonatan Sindel/Flash90)
Governor of the Bank of Israel Amir Yaron attends a press conference on March 31, 2019. (Yonatan Sindel/Flash90)

The Bank of Israel on Monday kept its key lending rate unchanged at 0.1 percent as the coronavirus pandemic continued to weigh on economic activity and a second lockdown led to a sharp increase in unemployment.

“The economy is in a prolonged exit process from the second lockdown, but there is uncertainty regarding the continuation of the exit from the lockdown in view of the apparent increase in morbidity,” the central bank said in a statement.

The broad unemployment rate reached approximately 23 percent of the labor force in the first half of October, compared with about 11 percent in the first half of September. With the start of easing the lockdown, the unemployment rate moderated to approximately 18%, the central bank said in a statement.

“News from abroad regarding progress in vaccine development is positive, but in the meantime, it is unclear when the vaccines will be distributed in Israel and abroad. Until then, morbidity is expected to continue affecting economic activity,” the statement said.

The adverse impact on economic activity as a result of the second lockdown was less severe than that of the first lockdown, which started in March, “but the exit from the second lockdown has been slower, and there is variance in the adverse impact on activity across various industries. Some firms have been able to adapt their operations to the COVID-19 restrictions, but industries such as tourism, restaurants, education, and leisure are more restricted and have not returned to the pre-crisis levels of activity,” the statement said.

The Bank of Israel Research Department revised its estimates, and GDP is now expected to decline by 4.5% in 2020 in a best-case scenario — if there are no significant drawbacks in removing the restrictions until the end of the year — and by 5% in a worst-case scenario, if restrictions are tightened due to an increase in morbidity.

“Regarding 2021, a high level of uncertainty remains regarding the forecast, in view of the recent increase in the infection coefficient and the probability of additional lockdowns compared to the chances of a vaccine during 2021,” the statement said.

The positive results in coronavirus vaccine tests are “increasing optimism regarding the rapid return of the economy to a path of growth in the coming year,” the statement said. “However, the adverse impact on the economy, and particularly on the labor market, is expected to be prolonged.”

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