Bank of Israel leaves rate unchanged as nation sees ‘rapid’ economic recovery

Central bank governor Amir Yaron says at end of 2022 growth is expected to be just 1.4% lower than before pandemic, ‘almost fully canceling’ coronavirus impact on GDP

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 left its short-term interest rates unchanged on Monday, for an eighth straight meeting of its Monetary Committee, as the nation showed signs of a “rapid” recovery from the economic crisis caused by the coronavirus pandemic due to a world-leading vaccine rollout.

“The Israeli economy is recovering at a rapid pace, following the exit from the third lockdown,” the central bank said in a statement. “The effectiveness of the vaccination program has led to a sharp decline in morbidity rates, and has allowed a broad relaxation of the limitations on activity.”

Israel’s economy contracted 2.6% in 2020, but outperformed OECD nations, where the average contraction was 5.5%. Economic growth is expected to surge this year, with the Bank of Israel forecasting a 6.3% rise in GDP for 2021. In 2022, the central bank forecast GDP growth of 5 percent.

“The meaning of this growth is that the level of GDP at the end of 2022 is expected to be only approximately 1.4 percent lower than the level that was expected before the crisis, so that by the end of 2022 the Israeli economy is expected to have almost fully canceled out the crisis’s impact on GDP level,”  Amir Yaron, the governor of the Bank of Israel, said at a press conference on Monday.

Israelis, some wearing protective face masks and some not, at a cafe in Tel Aviv on June 16, 2020. (Miriam Alster/Flash90)

Economic indicators regarding economic activity in March “were at the highest level since the beginning of the crisis,” the statement said, with “a marked increase in activity” in those industries that were particularly hard-hit by the limitations. The broad unemployment rate declined in the first half of March, to 12 percent. “Data for the end of March and for April are expected to indicate a further decline in the broad-definition unemployment rate,” the statement said.

The broad unemployment rate is expected to decline to 7.5% by the end of 2021. The unemployment rate in 2022 is expected to continue to decline, to about 6% in the fourth quarter of the year — a level that is still higher than the pre-crisis level, when unemployment was below 4%.

‘Accommodative for long’

“The opening of the economy and the return to normal life in Israel are expected to support continued rapid growth in the coming year. However, there are still challenges to economic activity in view of the health risks in Israel and abroad,” the statement said. “The crisis’s adverse effects on the economy, particularly the labor market, are expected to be prolonged.”

The central bank’s Monetary 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 support 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.”

The inflation environment has seen an upward trend, but remains low, the central bank said. The consumer price index (CPI) increased by 0.6 percent in March, following an increase of 0.3 percent in the February CPI. Both figures were “higher than expected,” the statement said, bringing inflation for the past 12 months to 0.2 percent.

Even so, medium- and long-term inflation expectations are within the target range. The official annual inflation target is 1%-3%.

“We will be patient with inflation,” the governor Yaron said at the press conference, adding that he believes interest rates will continue to be “low for longer.” Even so, if there is an explosion of inflation, then the central bank “has all the tools” to deal with such a situation.

With regard to the political uncertainty that is gripping the nation, which has held a fourth general election in two years with no clear winner in sight, the central bank said that there is “uncertainty regarding the policy path that the incoming government will adopt.”

It is of the utmost urgency, Yaron said at the press conference, to pass the 2021 budget and to promote the approval of the 2022 budget on time, in order to “establish economic priorities, and to initiate the reforms and long-term investments that are essential to accelerating the economy.” Israel has been without an approved budget since 2018, amid its political instability.

The government deficit is expected to be 8.2 percent of GDP in 2021, and 3.6 percent of GDP in 2022. The debt to GDP ratio is expected to be about 77 percent in each of these two years, the central bank forecast.

Since the pandemic began, the central bank has lowered its key rate once — from 0.25% in April. The bank has bought government and corporate bonds and offered cut-rate loans to banks to encourage lending to small businesses to stem the damage of the pandemic on the economy.

“The very accommodative monetary policy will continue to accompany the Israeli economy’s exit from the economic crisis,” Yaron said.

To help stem the gains of the shekel, the central bank has purchased almost $14 billion worth of foreign currencies the first three months of 2021. The Bank of Israel said in January it would acquire NIS 30 billion in foreign currency this year to curb the rise of the shekel, to help the nation emerge from the crisis.

“We will continue to implement this program as we announced, and will even expand it if necessary, in accordance with economic conditions and development,” Yaron said at the press conference.

The dollar weakened on the shekel on Monday and the representative rate was set at NIS 3.2650 to the dollar.

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