Bank of Israel leaves rate unchanged as economy recovers but ‘challenges remain’

Central bank keeps its key lending rate at 0.1% in line with forecasts; says monetary policy will continue to be ‘accommodative’ for a ‘prolonged time’ using a range of tools

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

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

The Bank of Israel held its key lending rate unchanged on Monday at a record low level of 0.1%, as “challenges to economic activity” remain, even as a rapid coronavirus vaccination campaign is boosting economic growth and inflation is raising its head.

All 17 economists polled by Reuters had predicted no change in the lending rate set by the central bank’s monetary policy committee.

Activity in the economy is recovering quickly post-pandemic and the broad unemployment rate has dropped to 9.6% since the end of the third lockdown in February, the central bank said in a statement.

The recent deadly conflict with Hamas in the Gaza Strip, which lasted 11 days, had apparently caused “only a limited negative impact on the economy,” the statement said.

Israel’s economy shrank 2.6% in 2020 as authorities imposed lockdowns and social distancing measures to keep the coronavirus at bay. Israel, however, fared better than other developed nations, as its tech sector, which continued to work and export, helped keep the economy afloat. The S&P ratings agency forecasts the economy will grow 5% this year. In the first quarter, Israel’s economy contracted an annualized 6.5% from the prior quarter.

“The return to normal life in Israel supports rapid growth in the coming year,” the Bank of Israel statement 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 Committee will therefore continue to conduct a very accommodative monetary policy for a prolonged time, using a range of tools as necessary, including the interest rate tool, in order to continue supporting the attainment of the policy targets and the recovery of the economy from the crisis, and to ensure the continued orderly functioning of the financial markets.”

Israel’s inflation rate reached 0.8% in April after turning positive in March for the first time in a year.

“The inflation environment remains low, but is in an upward trend,” said the central bank in the statement.

Since the start of the pandemic, the central bank lowered its rate just once, from from 0.25% in April 2020.

To support the economy the central bank has bought government and corporate bonds and offered cut-rate loans to banks to encourage lending to small businesses.

It also bought nearly $20 billion of foreign currency in the first four months of this year to help stem the shekel’s gains, Reuters said.

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