Israel Monetary Policy May 2021

Israel: Bank of Israel leaves policy unchanged in May

At its 31 May meeting, the Bank of Israel (BoI) left the policy rate at 0.10%.

The decision was driven in part by a strong recovery in activity from February as Covid-19 restrictions were rolled back amid the country’s rapid vaccination rate. Moreover, price pressures have trended up so far this year, with the Bank expecting inflation to have returned to the 1.0%–3.0% target range in May. As such, further easing was not warranted. At the same time, it was premature to begin raising rates amid lingering pandemic-induced uncertainty, a soft labor market and still-mild price pressures.

In its communiqué, the BoI sounded slightly more upbeat on the outlook for the economy and inflation, but 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.

According to analysts at Goldman Sachs:

“Going forward, we expect the BoI to keep its policy rate on hold for a prolonged period. We do expect inflation to rise sharply in May due to very pronounced base effects, but we also think that various idiosyncratic factors are driving this and that inflation is likely to moderate once again in 2022. Furthermore, we think underlying appreciation pressures on the shekel remain, which should contribute to dovish policy. We do not expect the first rate hike until 2023Q1.”

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