Israel Monetary Policy July 2021

Israel: Bank of Israel leaves policy unchanged in July

At its 5 July meeting, the Bank of Israel (BoI) left the policy rate at 0.10%. However, the Bank announced it would end its NIS 40 billion loan program for SMEs on 1 October.

The decision to withdraw some monetary support was likely driven by the marked economic recovery in recent months at home and abroad amid the vaccine rollout. However, the Bank judged it was still premature to raise rates, as the recent uptick in domestic Covid-19 cases has injected some uncertainty into the economic outlook, and inflation has only just reentered the 1.0%–3.0% target range.

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) We think that the rise in inflation will be temporary and inflation will fall from its current levels next year. (2) We remain constructive on the shekel which is likely to limit how much the BoI can tighten. (3) The BoI remains focused on the labour market, and we think that it will not change rates before the unemployment rate falls to its pre-crisis level.”

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