BoI to buy corporate bonds, keeps rate unchanged

Amir Yaron  / Photo: Rafi Kotz, Globes

The Bank of Israel has kept the interest rate at 0.1% but is buying corporate bonds for the first time ever and has issued a bleaker growth forecast.

The Bank of Israel Monetary Committee has kept the interest rate unchanged at 0.1% despite pressure to cut it because of the economic recession caused by the coronavirus crisis. The Bank of Israel already cut the rate from 0.25% to 0.1% in April.

At the same time, the Bank of Israel Monetary Committee, headed by Governor Prof. Amir Yaron, has for the first time launched a plan to purchase corporate bonds on the secondary market. The aim of the plan is to ensure the continued orderly functioning of the corporate bond market, and to strengthen the pass through from monetary policy to the credit market, by reducing the interest rate at which companies issue credit in the capital market, and making additional sources of credit available for all industries.

The Bank of Israel will purchase bonds worth up to NIS 15 billion on the basis of a broad benchmark of securities. The benchmark includes only companies rated A- and higher, and does not include foreign companies’ bonds, bonds with an equity component, or bonds that are not indexed to the shekel and are not fixed rate. The market value of corporate bonds in Israel is about NIS 341 billion, and the benchmark covers 75 percent of the market.

The Bank of Israel also announced that it is renewing the plan under which it will provide the banking system with fixed-rate loans at a 0.1% interest rate, for a term of 3 years, with the goal of increasing the supply of bank credit to small businesses, and to assist them in getting through the coronavirus crisis.

The Bank of Israel will also create an infrastructure for expanding the range of assets that the banks can put up as collateral against credit in the special plan.

The Bank of Israel Research Department has also revised its forecast for the Israeli economy. GDP is projected to contract by 6% in 2020. At the end of May the Bank of Israel predicted a 4.5% contraction but the sitruation has worsened due to the resurgence of Covid-19. In 2021, GDP is projected to increase by 7.5%, slightly higher than the projection in the May forecast. The inflation rate in 2020 is expected to be -1.1%, lower than the previous forecast, and 0.7% in 2021, similar to the May forecast. According to the forecast, the Bank of Israel interest rate in one year is expected to be in the 0-0.1% range.

Published by Globes, Israel business news - en.globes.co.il - on July 6, 2020

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

Amir Yaron  / Photo: Rafi Kotz, Globes
Amir Yaron / Photo: Rafi Kotz, Globes
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018