The Bank of Israel Monetary Committee headed by Governor Prof. Amir Yaron has decided to keep the interest rate unchanged at its historic low of 0.1%. Most economists had expected the rate to remain unchanged due to the improvement in the economy since the previous decision last month. Some had expected that there might be a rate cut but the recent announcement that the economy grew strongly in the fourth quarter and the lifting of the third lockdown removed a rate cut from the agenda.
The Bank of Israel said, "Despite the second lockdown in October and the start of the third lockdown at the end of December, in the fourth quarter of 2020 GDP grew by 6.3% (2.9% net of vehicle imports)."
The Bank of Israel noted that the Israeli economy contracted by 2.4% in 2020, less severe than its previous forecast of a 3.7% contraction, and a better performance than most OECD countries. However, the Bank of israel warned that the adverse impact on the economy, and particularly on the labor market, is expected to be prolonged.
Factors contributing to the decision included, "The inflation environment remains low but continues to trend upward moderately. The CPI for January declined by 0.1%, following an identical decline in December, and the inflation rate in the past 12 months was -0.4%. In view of the accommodative monetary policy and the global inflation environment, inflation expectations for the coming year from all sources increased, and are around the lower bound of the target range. Expectations derived from the capital market for the first and second years increased markedly. The expectations for medium and long terms remain anchored within the target range.
On the shekel the Bank of Israel said, "From the previous interest rate decision until January 14, the shekel strengthened by 3.4% percent in terms of the nominal effective exchange rate. Following the Bank of Israel’s announcement on that date regarding the amount of intervention to be executed in 2021, the shekel weakened by 5.2%. This trend is expected to support export performance during the exit from the crisis, and a return of inflation to the target range.
The Bank of Israel has not changed its optimistic growth forecast of 6.3% for the Israeli economy in 2021. On the current situation the Bank of Israel said, "The economy is in the process of exiting the third lockdown that began at the end of 2020 and continued until the first week of February. This lockdown was the longest of the lockdowns thus far, but despite its duration, it was less stringent and its impact on economic activity was more moderate than expected and less than the previous lockdowns. The inoculation campaign is progressing rapidly and the vaccination rate of the population in Israel is the highest in the world. In contrast, the spread of more contagious variants and the high morbidity level are weighing on a return to enhanced economic activity."
Published by Globes, Israel business news - en.globes.co.il - on February 22, 2021
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