The Monetary Committee of the Bank of Israel, headed by Governor of the Bank of Israel Amir Yaron, has announced that it is leaving its key lending rate at 0.1%. This is despite the deepening economic recession in Israel as a result of the coronavirus pandemic, and the peak strength of the shekel. Before today's decision, expectations derived from market data were 50% for an interest rate cut and 50% for no change.
The Monetary Committee did however also announce two measures designed to boost liquidity and credit in the Israeli economy. In the first, the Bank of Israel will increase its program to purchase government bonds on the secondary market by NIS 35 billion. This is in addition to the NIS 50 billion bond purchasing program announced in March this year.
The other measure is the provision of four-year loans to the banks at a fixed interest rate of negative 0.1%, against loans that the banks extend to small and micro businesses, provided that the interest rate on these loans does not exceed prime plus 1.3%, i.e. 1.9% at the current prime rate of 0.6%. This program will amount to NIS 10 billion, and will be in effect until the end of June 2021.
The Monetary Committee's announcement states: "The Committee will expand the use of the existing tools, including the interest rate tool, and will operate additional ones, to the extent that it assesses that the crisis is lengthening and that it is necessary in order to achieve the monetary policy goals and to moderate the negative economic impact created as a result of the crisis."
The Bank of Israel Research Department’s forecast outlines two possible scenarios, based on two levels of control of the coronavirus pandemic. In the greater-control scenario, in which control over the pandemic is achieved, GDP is expected to contract by 5% in 2020 and to grow by 6.5% in 2021. In the more serious scenario, growth is expected to be negative 6.5% in 2020 and just 1% in 2021. In 2021, the unemployment rate in the greater-control scenario is expected to be 7.8%, while In the more serious scenario it is expected to be 13.9%. The debt to GDP ratio in 2021 is expected to be 76% in the greater-control scenario and 83% in the more serious scenario.
The Monetary Committee notes that the inflation environment remains low. Inflation in the past 12 months is negative 0.7%, and one-year expectations from all sources remain below the lower bound of the 1-3% inflation target range. Short- and medium-term forward expectations have declined slightly since the previous interest rate decision, while long-term expectations remain anchored within the target range.
Published by Globes, Israel business news - en.globes.co.il - on October 22, 2020
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