Israel Monetary Policy February 2021

Israel: Bank of Israel leaves policy unchanged in February

At its 22 February meeting, the Bank of Israel (BoI) left the policy rate at 0.10%.

The decision to keep monetary policy unchanged was driven in part by a more upbeat assessment of the economy: The contraction in 2020 was less sharp than expected, and Israel is currently exiting its third lockdown amid a rapid domestic vaccination campaign. Moreover, the Bank highlighted an increase in inflation expectations for the year ahead against a backdrop of rising global oil prices, while the BoI’s currency market intervention since January has tamed the strength of the shekel.

The BoI reiterated that it stands ready to “expand the use of the existing tools, including the interest rate tool, and will operate additional ones” if required. Despite highlighting the fast pace of vaccinations, the Bank once more cautioned that risks remain high. As such, further monetary easing is possible going forward if the economy falters and/or inflation fails to pick up. However, this will likely be delivered through non-conventional means rather than further rate cuts.

According to analysts at Goldman Sachs:

“Going forward, we expect the BoI to keep the policy rate on hold and maintain a dovish stance for a long period, despite our above-consensus growth forecast of +7.5%yoy in 2021, for three reasons: (1) The BoI expects the impact of the pandemic on the labour market to be prolonged, despite the optimism around the vaccination campaign. (2) Although the shekel weakened following the BoI’s announcement to expand its FX purchases to US$30bn, we think that the shekel strength is warranted by the macroeconomic fundamentals and the appreciation pressures are likely to continue. (3) We expect inflation to rise in April due to sharp base effects, but we do not see it sustainably entering the 1-3% target range of the BoI in the near future.”

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