Israel Monetary Policy October 2020

Israel: Bank of Israel keeps rates unchanged in October, but introduces additional easing measures

At its 22 October meeting, the Bank of Israel (BoI) left the policy rate at 0.10%, as expected by market analysts. However, the Bank announced the expansion of its bond purchasing program by ILS 35 billion (roughly USD 10 billion) and extra steps to boost credit.

The decision to ease policy was likely driven by a desire to support the economy, which has come under pressure due to the second lockdown imposed in September. Moreover, inflationary pressures are extremely weak—prices have fallen in annual terms for the last six months in a row—providing further justification for the move.

The BoI maintained a dovish outlook, reiterating 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 through non-conventional measures.

As analysts at Goldman Sachs comment:

“The decision today confirms our thinking that the BoI sees the policy rate of +0.10% as sufficiently low and remains focused on the transmission of low rates to the rest of the economy. The remarks by Governor Yaron echoed this idea. We think the BoI has more room to ease policy, given a sizeable output gap, persistently negative inflation and a strong shekel. Nevertheless, based on the Monetary Committee’s preferences, we expect the policy rate to remain on hold at +0.10% and any additional easing to come through further quantitative and credit easing measures.”

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