In the light of the volatility on financial markets, globally and in Israel, the Bank of Israel will embark on a more expansionist monetary policy, and will act in the bond market, the central bank's Monetary Committee decided yesterday evening. In addition, the Bank of Israel will carry out repo deals with government bonds as collateral vis-a-vis financial institutions. Separately, the Ministry of Finance and the Israel Tax Authority decided this morning on a ten-day postponement of the date for reporting and payment of VAT, from March 16 to March 26.
The Bank of Israel's move comes against the falls in the bond market. The rise in yields on ten-year shekel government bonds last week was one of the largest in the world. The cumulative decline in the long-term bond indices in Israel (5-10 years in index-linked bonds and 5 years plus for shekel bonds) in the last few sessions was about 6%. In shekel bonds, the decline has wiped out the rises since the beginning of the year.
This is not the first time that the Bank of Israel has provided support to the financial system via the bond market. In February 2009, against the background of the sub-prime crisis, the bank came out with a purchasing program amounting to NIS 200 million daily. The main aim of such a move, then and now, is to expand liquidity in the economy. The central bank has not yet provided details of the extent of the intended purchases, and market sources say that this is probably not its last move.
"The Bank of Israel will act in the open market and will purchase on the secondary market government bonds of various types and for various period in order to ensure that the government bond market functions properly," the statement from the Monetary Committee says.
The US Federal Reserve has expanded its bond purchases ("quantitative easing"), alongside massive support in the repo market, to the tune of $1.5 trillion.
Governor of the Bank of Israel Amir Yaron said, "The coronavirus is meeting the economy at a very good place. The strong economic data-including a low debt to GDP ratio and low unemployment rate, a current account surplus, a high level of foreign exchange reserves, and a robust financial system-increase the economy’s resilience to the developments.
"The decisions made on various limitations have weighty economic consequences. Under my leadership, the Bank of Israel is acting to minimize the negative impact to businesses and to the public, so that we can weather this period calmly, with as little economic damage as possible.
"Therefore, at my instruction, the Bank of Israel today published a set of policy measures to support the capital markets, assist in the transmission of monetary policy, and make it easier for business and consumer customers of the banking system at this time.
"We are prepared for any development, and will continue to take all measures necessary in accordance with various developments. Monetary policy remains accommodative to support economic activity. The Bank of Israel, and I as its governor, have a variety of tools to support economic and financial activity in the economy."
Published by Globes, Israel business news - en.globes.co.il - on March 15, 2020
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