search

Bank of Israel holds rate at 0.1% as fast vaccination pace injects optimism

Bank of Israel forecasts GDP contraction of 3.7% in 2020; if fast pace of inoculation continues, economy seen to grow 6.3% in 2021 and 5.8% in 2022, but uncertainty remains high

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

Bank of Israel Governor Amir Yaron, speaking at the Eli Hurvitz Conference on Economy and Society organized by the Israel Democracy Institute, December 17, 2019 (Michal Fattal)
Bank of Israel Governor Amir Yaron, speaking at the Eli Hurvitz Conference on Economy and Society organized by the Israel Democracy Institute, December 17, 2019 (Michal Fattal)

The Bank of Israel on Monday kept its benchmark rate at an all-time low of 0.1%, saying the fast pace of inoculation against the coronavirus pandemic “increases optimism regarding a rapid return of the economy to a path of growth in the coming year.”

The central bank revised upwards its macroeconomic forecast for the coming two years, estimating that the GDP contraction in 2020 will come in at 3.7%. GDP is expected to grow by 6.3 percent in 2021, and the broad unemployment rate is expected to decline during the year to 7.7 percent of the labor force in the fourth quarter of 2021 — assuming the rapid inoculation continues.

In 2022, GDP is expected to grow by 5.8 percent, the unemployment rate is expected to continue to decline to 5.4 percent, and the debt to GDP ratio is expected to be 75 percent, the statement said.

The fast pace of vaccination will help the Israeli economy recover, Amir Yaron said in a press conference on Monday. “It will lead to greater and clearer economic activity” and less health uncertainty. This which will help the economy grow and return to the path it was on before the pandemic struck, he said, which will be good for businesses and households. Even so, because Israel is an open economy, recovery will also depend on the pace of global recovery and inoculation, he said.

If inoculation slows down in Israel, and continues until the middle of 2022, GDP is expected to grow by 3.5% in 2021, and the broad unemployment rate is expected to decline to about 11%. In 2022, GDP growth is expected to be 6%, while unemployment is expected to decline to 7%, and the debt to GDP ratio in 2022 is expected to be 82%.

Israelis wait to receive a COVID-19 vaccine at a vaccination center operated by the Tel Aviv Municipality with Tel Aviv Sourasky Medical Center (Ichilov), at Rabin Square in Tel Aviv, December 31, 2020 (Miriam ALster/Flash90)

“In view of the fast pace of inoculation, it seems that currently, the rapid inoculation scenario is significantly more likely to play out than the slow scenario,” the central bank said in a statement.

Of 14 economists polled by Reuters, 12 forecast the central bank will keep the benchmark rate unchanged.

Over 1 million people have already been vaccinated, or some 12% of the population, making Israel a global leader in the percentage of vaccinations per capita.

Even so, the nation has entered its third lockdown this year and the pandemic is continuing to spread, with 49,643 active cases in the country as of Monday morning and 5,135 new cases confirmed the previous day. Last week daily cases broke through the 6,000 mark.

According to the Health Ministry, 6.6% of tests returned positive on Sunday, the highest rate in months. The death toll stood at 3,416.

The central bank’s Monetary Committee said that the risks to economic activity continue to “remain high, and the adverse impact on the economy, and particularly on the labor market, is expected to be prolonged.”

The committee said it will continue to use a range of monetary tools to ensure the continued orderly functioning of the financial markets, as needed.

Since the start of the pandemic, the central bank lowered its key rate just once — from 0.25% in April — and has used measures such as buying government and corporate bonds and offering loans to banks to encourage lending to businesses struggling during the pandemic, to keep liquidity in the market and avoid a cash crunch.

The central bank said the direct weekly cost of the third lockdown compared with a state of full economic activity is about NIS 2.5 billion ($780 million). If the terms of the lockdown are further intensified, then the cost will be higher, the central bank governor Yaron said in the press conference.

The overall government deficit at the end of 2020 is estimated to come in at about 12 percent of GDP.

The absence of a national budget for 2021, and the need to rely on an interim budget that was basically constructed in 2018, “weigh considerably on the government’s ability to operate growth accelerators and to take steps to prepare the economy for the post-crisis period,” Yaron said.

He added that the central bank will continue to intervene in the foreign currency market to keep the rise of the shekel in check. The shekel appreciated almost 7.5% in 2020 against the dollar, prompting the Bank of Israel to buy a record $20 billion in the foreign exchange market over the course of the year, Yaron said. “This has moderated the appreciation,” he said. “And we will not be shy to continue to use this tool as long as the economy is in a crisis.”

read more:
comments