The Bank of Israel Monetary Committee headed by Governor Prof. Amir Yaron has kept the interest rate unchanged at 0.25%. Many economists had predicted that the rate would be cut to 0.1% because of concerns that the coronavirus would cause an economic slowdown.
In explaining its decision, the Bank of Israel said, "The Monetary Committee's assessment is that in view of the inflation environment in Israel, the monetary policies of major central banks, developments in the global economy and the risks to the domestic economy, and the development of the exchange rate, it will be necessary to leave the interest rate at its current level for a prolonged period or to reduce it in order to support a process at the end of which inflation will stabilize around the midpoint of the target range, and so that the economy will continue to grow strongly. Furthermore, the Committee is taking additional steps to make monetary policy more accommodative. The Bank of Israel continues to monitor developments in inflation, the real economy, fiscal policy, the financial markets, and the global economy, and will act to attain the monetary policy targets in accordance with such developments."
The Bank of Israel is sanguine on the effects of the coronavirus on the world economy. It said, "The outbreak of the coronavirus in China is casting uncertainty regarding future economic activity globally and in Israel, and regarding the impact on inflation and on the financial markets. The baseline scenario guiding the assessments of most international financial institutions is that the spread of the virus will be halted in the coming months, and the overall impact on the global economy is expected to be limited. The Bank of Israel’s assessment in this scenario is that no significant macroeconomic impact is expected in Israel. If the crisis persists and spills over into additional countries, and particularly if strict preventative measures are required in Israel, it is expected to have a more significant impact. In such a scenario, the Monetary Committee has a range of tools to make monetary policy more accommodative.
On inflation, the Bank of Israel said, "The inflation environment continues to be low. The January CPI was lower than expected, and inflation over the past 12 months remains 0.3%. Inflation excluding energy and fruits and vegetables also remains low. The moderation of inflation is largely influenced by the appreciation of the shekel. It is possible that in the coming months, the year over year inflation rate will be negative, but it is expected to move back toward the lower bound of the target range in the second half of the year."
On the shekel, the Bank of Israel said, "Since the previous interest rate decision, the shekel has strengthened by approximately 3 percent in terms of the nominal effective exchange rate, a development that continues to weigh on the return of inflation to the target range."
Published by Globes, Israel business news - en.globes.co.il - on February 24, 2020
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