Israel Monetary Policy August 2020

Israel: Bank of Israel keeps rates unchanged in August

At its 24 August meeting, the Bank of Israel (BoI) left the policy rate at 0.10%, as expected.

The decision was likely driven by a desire to assess the impact of past easing, which has consisted of a 15-basis-point policy cut and less conventional measures such as bond purchases, credit schemes and changes to macroprudential regulations. Moreover, as the Bank highlighted, financial markets have been stable recently, the credit market has improved and bond yields are low, providing the BoI with the space to pause. Deflation and an unsteady economic recovery in Q3 were not judged to be reason enough to implement further stimulus at the current juncture.

The BoI maintained a dovish outlook, and said that it stands ready to “expand the use of the existing tools, including the interest rate tool, and will operate additional ones” if required. As such, further monetary easing is possible going forward, although this will likely be delivered chiefly through non-conventional measures, given the Bank appears reluctant to use negative interest rates.

As analysts at Goldman Sachs comment:

“Given a sizable output gap, inflation running in negative territory and a strong Shekel, we think the BoI has more room to ease. Nevertheless, we think that the previous communication of the Monetary Committee and the decision today suggest that the BoI will not reduce rates further. Instead, we expect the Monetary Committee to focus on the transmission of low rates to the rest of the economy and any additional easing to come through credit related measures. The BoI already has a government bond purchase programme and a corporate bond purchase programme it can expand further if it deems necessary.”

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