Bank of Israel cuts interest rate to 0.1%

Prof. Amir Yaron

In the wake of the coronavirus crisis, the Bank of Israel sees the economy contracting 5% in 2020 and growing 9% in 2021.

The Bank of Israel Monetary Committee has cut the interest rate from 0.25% to 0.1%, in response to the coronavirus pandemic and the expected global recession. This reverses the decision to raise the rate from 0.1% to 0.25% in November 2018, one month before Prof. Amir Yaron became Governor. This is the first time that the interest rate has been cut since 2015.

The Monetary Committee also decided on two additional steps: To put a new monetary instrument into operation, which will provide monetary loans to banks for a term of three years, with a fixed interest rate of 0.1%. The loans are contingent on extending credit to small and micro businesses; to expand the plan through which repo transactions are carried out vis-à-vis financial entities, so that the agreements can include corporate bonds (in addition to government bonds) as security. This second step, the Bank of Israel says will strengthen the plan’s support of liquidity and the orderly functioning of the financial markets.

In explaining its decisions, the Bank of Israel said that the coronavirus crisis halted the trend of growth and the economy has shifted into contraction. More than one-third of the economy is shut down, private consumption is lower by about 25% relative to the pre-crisis period, and over 1 million workers, 24% of the workforce, have claimed unemployment benefits.

According to the Bank of Israel's Research Department’s assessment, GDP contracted by 5% in the first quarter (quarterly terms). Based on the Department’s macroeconomic forecast, assuming that the main part of the coronavirus restrictions are removed gradually by the end of June, negative growth of approximately 5% is expected in 2020, with an unemployment rate of 6% (annual average). The beginning of a recovery in the third quarter will lead to growth of 9% in 2021, though the unemployment rate is expected to decline gradually and only toward the end of 2021 will it approach the low pre-crisis levels. The debt to GDP ratio is expected to reach about 75% in 2020. Note that there is considerable uncertainty regarding the forecast crisis, in view of the lack of clarity about the length and magnitude of the crisis.

The Bank of Israel expects global growth to contract markedly in 2020, and the spread of the crisis has led to very strong policy responses by central banks and governments. Commodity prices collapsed by tens of percent. In China, a recovery in economic activity is starting to be observed.

The Bank of Israel observes that the crisis led to a shock in capital markets in Israel and worldwide, with steep declines in equity prices and an increase in volatility and risk. In Israel, the sharp increase in government bond yields and in corporate bond spreads was halted following measures taken by the Bank of Israel and the halt of mutual fund withdrawals.

Regarding the shekel, the Bank of Israel says there has been exceptional volatility in the exchange rate, against the background of dollar liquidity distress in Israel and worldwide. The swap transactions carried out by the Bank of Israel moderated the volatility, and meanwhile, the shekel has weakened 5.8% against the dollar and 3.4% in terms of the effective exchange rate.

Published by Globes, Israel business news - www.globes-online.com - on April 6, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Prof. Amir Yaron
Prof. Amir Yaron
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