Risk of the Delta variant and Israel Bank's position

The Bank of Israel has kept its base interest rate at 0.1%, citing dangers to the nascent Delta economy during the COVID-19 pandemic.

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צילום: Depositphotos

At the 10th straight political meeting on Monday, the Bank of Israel kept its base interest rate at 0.1% citing dangers to the nascent Delta economy in the COVID-19 epidemic.

Inflation has begun to increase in Israel but politicians have stated it is hard to assess whether, like with other central banks, the rise is temporary, and there remains a widespread worry.

Although the economy of Israel is mostly open, with viral infections falling steeply, the number of cases in recent weeks has steadily increased.

The central bank stated in a declaration, which referred primarily to the labor markets, "At this time morbidity is low, but the development of the illness poses some risks for a prolonged economic recovery."

"Therefore, for a protracted period, the (monetary) committee is still conducting a very adaptive monetary policy."

The employees of the bank decreased their estimated economic growth to 5.5% in 2021 from 6.3%, but forecast 6% growth in 2022.

All 16 economists interviewed by Reuters indicated that, despite reducing them from 0.25% more than a year ago, they anticipated the Monetary Policy Committee would stabilize their rates.

In 2022 or 2023, experts have tried to get the Bank of Israel clearer about its QE initiatives, with the next rate change generally predicted. The central bench has around 20 billion shekels of shy bonds purchased with stable bond rates at a targeted ceiling of 85 billion shekels ($ 26 billion).

Governor Amir Yaron of the Bank of Israel said the initiative should be finished by the year's end, given the current purchasing pace.

"We'll announce our actions closer to that timeframe and, of course, they'll be subject to market conditions at that time," he said.

For a ninth straight meeting of its Monetary Committee, the Bank of Israel kept its short-term interest rates constant, as the nation demonstrated the signs of a "quick" recovery from the economic crisis created by a global vaccine deployment triggered by the coronavirus epidemic.

The central bank declared in a statement that, "Israel's economy is recovering fast after it is from the third lockdown. The efficacy of the vaccine program has led to a dramatic decrease in morbidity and a broad easing of activity limits. One of the main things that made Israeli’s economy rebound was the growing tendency of Forex trading. In Forex trading there are many companies, also known as brokers, who pay taxes for the government. Through that tax, the government is able to generate wealth."

"In addition to that, as time goes by more and more people get involved in FX trading, which allows investors to exchange currency pairs and through the volatility of asset values get money. Because of that, according to the data, many people from Israeli and around the world, as well, are searching for the best way to trade Forex profitably, in order to gain money, as after the pandemic period many people have lost their jobs. Moreover, it is worth noting that, in 2020 the Israeli economy contracts were 2.6%, while the OECD countries excelled, with a 5.5% decrease on average. The Bank of Israel anticipating a GDP growth of 6.3 percent in 2021 is anticipated to climb this year. GDP growth forecasted by the central bank in 2022 was 5%.

"The significance of this growth is that GDP is expected to be just about a 1.4% lower by the end of 2022 than expected prior to the economic crisis so that by the end of 2022, the impact of the crisis on the GDP level is almost completely canceled," said the Bank of Israel's Governor Amir Yaron at a press conference.

The March economic indicators "was at the greatest level since the crisis began," the declaration claimed, with "a notable increase in businesses," particularly hard impacted by constraints. In the first half of March, the overall unemployment rate fell to 12%.

"There is likely to be a further fall in the broad-based unemployment figure for the end of March and April," the statement added.

By the end of 2021, the large unemployment rate will drop to 7.5%. It is predicted that the unemployment rate would still drop to around 6% in the fourth quarter – still more than the pre-crisis unemployment level when the jobless rate was lower than 4% in 2022.

In the first five months of 2021, the Central Bank also purchased $22 billion of foreign currency from a budgeted $30 billion in an attempt to hold up a strong shekel.

Yaron emphasized, "We are definitely not limiting ourselves to the maximum $30 billion intervention for this year when the program comes to an end," and added that the bank would continue to take account of its economic activities as appropriate on the Forex market.

The shekel in late trade remained steady at 3.26 per dollar.

However, the Bank of Israel announced it will discontinue a program that would give long-term financing to small companies via the banking system by Oct 1.

In May, Israeli inflation slowed from 0.8% in April to 1.5% – close to the official midpoint of the 1-3% annual objective.

In 2021 and in 2022, analysts of the central bank estimate a 1.7% inflation rate, with the main interest rate remaining constant throughout the following year.

They also expect that the budget deficit will decrease to 7.1% of GDP in 2021 and 3.8% in 2022 following a year ago of 11.6%.

"It is predicted that the opening of the economy and the return to regular life in Israel would help sustain fast development in the next year. But in view of the health concerns in Israel and abroad, there are still economic problems," the statement added. "The negative impacts of the crisis on the economy, especially on the labor market, are anticipated to continue."

The Monetary Committee of the Central Bank will, therefore, "continue to conduct a monetary policy that is very accommodating for a long time, using, where necessary, a range of instruments, including an interest rate tool, to support policy objectives, recover the economy from the crisis, and ensure that the Financial Markets continue to function in a proper way."

Inflation has been rising, but remains modest, according to the central bank. In March, the CPI (consumer pricing index) rose by 0.6% following a February CPI gain of 0.3%. The statement stated that both data were "more than expected," bringing inflation to 0,2 percent over the last 12 months.

Nevertheless, inflation forecasts in the medium and long term remain within the target range. The official objective for yearly inflation is 1%-3%.

The governor remarked during a news conference, "We will be patient with inflation," but he adds that he expects the rate will continue to be "low for longer."

The central bank stated, with reference to the political uncertainty which has affected the nation which, in two years, has had its fourth general election without a clear winner in sight, that "the political route the new administration takes is unknown."

At the press conference, Yaron said it was extremely urgent to vote on the 2021 budget and promote timely adoption of the 2022 budget so that "economic priorities are identified and long-term reforms and investments which are critical for accelerating the economy are initiated." Israel, with its political instability, has been without a budget since 2018.

It is predicted that the government's deficit will be 8.2% of GDP in 2021 and 3.6% of GDP in 2022. In each of these years, the central bank's debt-to-GDP ratio is projected to be about 77 percent.

The central bank has decreased its key rate once since the epidemic started, from 0.25% in April. The Bank has purchased corporate and government bonds and provided banks with cut-off credit to encourage small companies to stop the epidemic harm caused to the economy.

"It will continue to follow Israel's escape from the economic crisis through the very accommodatory monetary policy," Yaron added.

In order to reduce the shekel's profits, in the first three months of 2021, the central bank bought about $14 billion from foreign currencies. The Bank of Israel announced that it will purchase NIS 30 billion this year in foreign currency to reduce the shekel increase and assist the nation get out of the crisis, in January.

"We will continue implementing this program in line with the economic and development conditions, as we have indicated, and if necessary even expand it," said Yaron during the news conference.

The shekel weakened the dollar and the NIS 3,2650 dollar representing the dollar.