Israel Monetary Policy July 2020

Israel: Bank of Israel keeps rates unchanged in July but announces extra measures to boost the economy

At its 6 July meeting, the Bank of Israel (BoI) left the policy rate at 0.10%. However, the BoI announced it would begin purchases of corporate bonds, and renewed its business lending scheme with looser criteria regarding the collateral banks can use to apply for credit.

The decision to provide further monetary stimulus was aimed at protecting the economy. The Bank has markedly revised down its GDP projections for this year, and now expects a 6.0% contraction, compared to the 4.5% drop forecast in May, as a resurgence of domestic coronavirus cases weighs on the recovery in activity. In addition, price pressures are extremely weak amid the tepid economy, low oil prices and the strengthening shekel, providing the BoI with a further rationale to loosen its stance.

The BoI maintained a dovish outlook, and said 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 Goldman Sachs comments:

“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.”

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