Israel Monetary Policy January 2021

Israel: Bank of Israel leaves policy unchanged in January

At its 4 January meeting, the Bank of Israel (BoI) left the policy rate at 0.10%. This came after the Bank’s announcement in mid-December that it would begin repo transactions with non-bank credit providers in a bid to boost credit to SMEs, which have been particularly hard-hit by successive lockdowns.

The decision to keep monetary policy unchanged in January was likely driven by a desire to examine the impact of past easing. Moreover, the vaccine campaign is well underway—Israel has vaccinated a larger share of its population than any other country—boding well for the 2021 outlook. As BoI stated: “The Research Department’s forecast outlines two potential scenarios that are influenced by the pace of inoculation of the population. In the rapid inoculation scenario, GDP is expected to grow by 6.3 percent in 2021 […]. In the slow inoculation scenario, growth is expected to be 3.5 percent in 2021 […]. In view of the fast pace of inoculations so far, it seems that the rapid inoculation scenario is more likely to come about than the slow inoculation scenario.” On the other hand, extremely weak price pressures, currently soft economic conditions and the strong shekel ruled out any tightening.

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. Despite highlighting the fast pace of vaccinations, the Bank cautioned that risks remain high. As such, further monetary easing is possible going forward, although this will likely be delivered through non-conventional means.

As analysts at Goldman Sachs comment:

“We think the BoI has ample room to ease policy further given sizable spare capacity in the economy, persistently weak inflation and ongoing Shekel strength. Nevertheless, we expect the BoI to keep its policy rate on hold at +0.10% going forward, as it deems the policy rate low enough and is instead focusing on the transmission of low rates to the rest of the economy. Hence, we expect any additional easing to be delivered through credit/liquidity related measures. The BoI already has three programmes it can expand: (1) Government bond purchase programme, (2) Corporate bond purchase programme and (3) Provision of loans to banks at a rate of -0.10% conditional on lending to small businesses.”

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