Bank of Israel keeps rates unchanged, says COVID still poses ‘risk’ to economy
Central bank holds key lending rate at record low 0.1%; monetary policy will be ‘very accommodative’ for a prolonged period; cuts forecast for GDP growth to 5.5% in 2021
Shoshanna Solomon was The Times of Israel's Startups and Business reporter
The Bank of Israel said Monday it is leaving its key lending rate unchanged at a record low 0.1 percent, saying that the central bank will continue to conduct a “very accommodative monetary policy” for a prolonged period of time.
The Bank of Israel also issued updates to its 2021 and 2022 macro forecasts, saying GDP will grow by 5.5% in 2021 and by 6% in 2022, such that the level of GDP at the end of 2022 is expected to be only about 0.5% lower than the level that was expected prior to the crisis.
In April, the central bank forecast 6.3% GDP growth this year, as a world-beating vaccination drive kept the coronavirus pandemic in check. Infection rates, however, have started rising again, due to the Delta variant of the coronavirus.
“At this stage, the morbidity level is low, but the spread of the disease poses some risk to the continued recovery of the economy,” the central bank said in its Monday statement.
“The return to normal life in Israel supports rapid growth in the coming year,” the central bank said. “However, there are still challenges to economic activity in view of the health risks in Israel and abroad and the impact to the economy, particularly the labor market.”
The central bank’s Monetary Policy Committee “will therefore continue to conduct a very accommodative monetary policy for a prolonged time, using a range of tools as necessary, including interest rate, in order to continue supporting the attainment of policy targets and the recovery of the economy from the crisis, and to ensure the continued orderly functioning of the financial markets.”
Bank of Israel Governor Amir Yaron said at a press conference that “it remains difficult to assess the risk posed by the current variant given the high rate of vaccination amongst the population.
“In particular, we do not know if the increase in morbidity will be accompanied by a significant increase in the number of very ill and hospitalized patients and if it will compel the government to impose substantial limitations again on economic activity.”
Inflation is creeping upward but is still within the target range, the central bank said, at 1.5%. The inflation rate in the coming four quarters (ending in the second quarter of 2022) is expected to be 1.0%, and the inflation rate in 2022 is expected to be 1.2%. According to this forecast, the monetary interest rate is expected to be 0.1 percent one year from now, the statement said.
Yaron said that at this point, the Monetary Committee believes that “there is no concern of an outbreak of inflation.”
Assuming that the national budget passes as planned and that fiscal consolidation is pushed off to 2023, the government deficit in 2021 is expected to be 7.1 percent of GDP and in 2022 is expected to be 3.8 percent of GDP, the central bank said. The debt-to-GDP ratio is expected to be 74 percent in each of those years.
The central bank added that it has decided to end the program providing long-term loans to the banking system against loans to be provided to small and micro businesses on October 1, 2021, or upon the utilization of NIS 40 billion in the program.
At the start of the COVID-19 pandemic in March 2020, the central bank began a quantitative easing program, saying it would buy as much as NIS 50 billion ($15 billion) of government bonds to keep interest rates at bay and the economy from shutting down. In October, the level was raised to NIS 85 billion.
Yaron said that the central bank will make a decision regarding the bond purchasing program toward the end of the year, by when it will have reached the targeted amount of bonds acquired.
Economists at Israel’s Bank Leumi Le-Israel said that the central bank’s decision to end the long-term loans to the banking system is a first step toward cutting back on its quantitative easing program.
“We estimate that the intention of the bank is to diminish its intervention in the market, gradually, and after it sees that such a step will not negatively affect the market,” Bank Leumi chief economist Gil Bufman said in a statement.
Referring to the plan to acquire $30 billion worth of foreign currency this year to keep the shekel’s appreciation in check, Yaron reiterated that the central bank “is not limited” to a maximum intervention of $30 billion for this year, and “when the program ends, the bank will continue to act in the foreign exchange market as needed, taking economic activity into account.”
