Bank of Israel keeps rates unchanged, says COVID still poses “risk” to economy
The Bank of Israel said on Monday it was leaving its key rate unchanged at a record 0.1%, saying the central bank would continue to conduct “very accommodative monetary policy” for an extended period.
The Bank of Israel has also released updates to its macroeconomic forecasts for 2021 and 2022, indicating that GDP will grow by 5.5% in 2021 and 6% in 2022, so that the level of GDP at the end 2022 is only expected to be around 0.5%. lower than the level expected before the crisis.
In April, the central bank forecast 6.3% GDP growth this year, as a worldwide-beating vaccination campaign brought the coronavirus pandemic under control. Infection rates, however, have started to rise again, due to the Delta variant of the coronavirus.
“At this stage, the level of morbidity is low, but the spread of the disease poses a risk to the continued recovery of the economy,” the central bank said in its statement on Monday.
“The return to normal life in Israel supports rapid growth over the coming year,” the central bank said. “However, there are still challenges for economic activity given the health risks in Israel and abroad and the impact on the economy, especially on the labor market.”
The central bank’s monetary policy committee “will therefore continue to conduct a very accommodative monetary policy for an extended period, using a range of tools if necessary, including the interest rate, in order to continue to support the achievement of political goals and economic recovery. crisis and ensure the continued and orderly functioning of financial markets.
The Governor of the Bank of Israel, Amir Yaron, told a press conference that “it remains difficult to assess the risk posed by the current variant given the high rate of vaccination among the population.
“In particular, we do not know whether the increase in morbidity will be accompanied by a significant increase in the number of critically ill and hospitalized patients and whether it will force the government to again impose substantial restrictions on economic activity. “
Inflation is rising slowly but remains within the target range, the central bank said, at 1.5%. The inflation rate over the next four quarters (ending in the second quarter of 2022) is expected to be 1.0%, and the inflation rate in 2022 is expected to be 1.2%. According to these forecasts, the monetary interest rate should be 0.1% in a year, the statement said.
Yaron said that at this point, the Monetary Committee felt that “there was no fear of spike in inflation.”
Assuming that the national budget is adopted as planned and that fiscal consolidation is pushed back to 2023, the public deficit in 2021 is expected to be 7.1% of GDP and in 2022 to 3.8% of GDP, the bank said. central. The debt-to-GDP ratio is expected to be 74% for each of these years.
The central bank added that it had decided to end the program of providing long-term loans to the banking system for loans to be given to small and micro-enterprises on October 1, 2021, or when using 40 billion shekels in the program.
At the start of the COVID-19 pandemic in March 2020, the central bank launched a quantitative easing program, saying it would buy up to NIS 50 billion ($ 15 billion) in government bonds for keep interest rates at bay and prevent the economy from shutting down. down. In October, the level was raised to 85 billion shekels.
Yaron said the central bank will make a decision on the bond purchase program towards the end of the year, when it reaches the target amount of bonds acquired.
Economists at Israel’s bank Leumi Le-Israel said the central bank’s decision to end long-term lending to the banking system is a first step towards scaling back its quantitative easing program.
“We believe that the intention of the bank is to decrease its intervention in the market, gradually, and after finding that such a measure will not negatively affect the market”, said the chief economist of Bank Leumi, Gil Bufman, in a statement.
Referring to the plan to acquire $ 30 billion in foreign exchange this year to control the appreciation of the shekel, Yaron reiterated that the central bank “is not limited” to a maximum intervention of $ 30 billion for this year. , and “when the program ends., the bank will continue to operate on the foreign exchange market as needed, taking into account economic activity.