Israel Monetary Policy August 2021

Israel: Bank of Israel leaves policy unchanged in August

At its 23 August meeting, the Bank of Israel (BoI) left the policy rate at 0.10%.

The decision to keep rates stable at their current low level was likely driven by the domestic surge in Covid-19 cases and reimposition of some restrictions, which has injected some uncertainty into the economic outlook. As such, it was premature to tighten policy. Moreover, inflation is currently within the 1.0%–3.0% target range, as are inflation expectations for the year ahead, providing the space for the Bank to maintain an accommodative stance.

In its communiqué, the BoI reiterated its guidance that it would “continue to conduct a very accommodative monetary policy for a prolonged time”. This suggests the policy rate is likely to stay unchanged in the short to medium term. Indeed, all our panelists see the policy rate remaining at 0.10% until at least 2023.

According to analysts at Goldman Sachs:

“Going forward, we do not expect the BoI to raise its policy rate before 2023 for three reasons: (1) The Delta variant creates downside risks to economic activity. (2) Although the recovery in the labour market continues, we think that it will take time for unemployment to return to its pre-Covid level. (3) We think that the recent increase in inflation is temporary, and we remain constructive on the shekel. In our view, these two factors will limit how much the BoI can tighten, even under a rapid economic recovery scenario.”

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