23 Oct

Israel maintains rate but boosts asset purchases

October 23, 2020

www.CentralBankNews.info

Israel’s central bank left its main interest rate steady but boosted its purchases of government bonds and said it would continue to implement an accommodative monetary policy after a second lockdown last month to prevent the spread of COVID-19 led to a sharp decline in economic activity.

The Bank of Israel (BOI) kept its main interest rate at 0.10 percent, unchanged since April when it cut it for the first time in five years in response to the economic hit from the coronavirus.

Prior to the April rate cut, BOI on March 23 launched a program to purchase 50 billion shekels of government bonds in the secondary markets to lower the cost of credit and boost economic activity.

“In view of the crises continuing to impact Israel and the world, the Committee decided to increase the government-bond purchase program by NIS 35 billion and thus continue to support financing ability in the economy, in view of the strengthening of the coronavirus crises and its economic effects,” BOI said, adding the bond purchases will allow it to lower the cost of credit for companies and households as a complementary tool to its short term interest rate policy.

“The Monetary Committee will continue to operate the tools at its disposal to the extent necessary in order to implement the extent of monetary accommodation required, and to ensure the continued orderly activity of financial markets in Israel,” BOI said, adding it will expand the use of its existing tools, including the interest rate tool and operate additional ones to the extent it assesses the crises is lengthening and moderate the negative economic impact.

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BOI also decided to extend credits to banks at a negative 0.1 percent against loans they give to small businesses at an interest rate not exceeding the prime rate plus 1.3 percent.

After recovering following the first lockdown in the Spring, Israel’s economy took a hit after a second lockdown was imposed on Sept. 18 after the country saw a surge in infections.

Prior to the second lockdown, unemployment had stabilized around 11 to 12 percent but it then jumped to 19 percent in the second half of September as the number of unemployment rose by about 300,000, the central bank said.

BOI’s research staff has forecast two possible scenarios. Under the first, in which control over the pandemic is achieved, the economy is expected to contract by 5 percent this year and then expand by 6.5 percent in 2021.

But in a more serious scenario, BOI sees growth contracting by 6.5 percent in 2020 and expand by just 1 percent in 2021, with debt also rising more.

Israel’s gross domestic product shrank by an annual 7.9 percent in the second quarter of this year after expanding by 0.5 percent in the first quarter. On a quarterly basis, GDP shrank 8.1 percent in the second quarter and shrinking 1.8 percent in the first quarter, meeting the technical definition of recession.

Israel is also experiencing deflation, with consumer prices falling by 0.7 percent in September, the 6th consecutive month of deflation.

Although the shekel is skirting with 10-year highs against the U.S. dollar, the BOI is more concerned with its trade-weighted level and against the euro – most of Israel’s trade is with the euro area – the shekel has lost ground this year.

After tumbling in March, the shekel has risen steadily against the dollar and was trading at 3.38 after today’s decision, up 2.4 percent since the start of this year.

But against the euro, the shekel was trading at 4.0 today, down 3 percent this year.

 

The Bank of Israel issued the following two statements:

“The Monetary Committee decides on October 22, 2020 

to keep the interest rate unchanged at 0.1 percent

 

In addition, the Committee decided:

  1. To increase the government-bond purchase program in the secondary market by NIS 35 billion.
  2. To implement an additional pillar of the program to extend credit to banks: Loans will be provided at a fixed rate of negative 0.1 percent against loans that banks extend to small businesses at an interest rate not exceeding Prime +1.3 percent.

 

 

v During the summer months—following the first lockdown and prior to the imposition of the second lockdown—economic recovery in Israel recovered rapidly. However, the imposition of the second lockdown in September, following an increase in morbidity, led to a sharp decline in activity and in demand.

v Prior to the imposition of the second lockdown, broad unemployment stabilized at around 11–12 percent. However, it jumped to 19 percent in the second half of September following the imposition of the second lockdown. The number of unemployed in the first half of September was about 470,000, and it increased by about 300,000 due to the imposition of the lockdown.

v The Research Department’s forecast outlines two possible scenarios. In the greater-control scenario, in which control over the pandemic is achieved, GDP is expected to contract by 5 percent in 2020 and to grow by 6.5 percent in 2021. In the more serious scenario, growth is expected to be -6.5 percent in 2020 and just 1 percent in 2021. The debt to GDP ratio in 2021 is expected to be 76 percent In the greater-control scenarioand 83 percent in the more serious scenario.

v The inflation environment remains low. Inflation in the past 12 months is -0.7 percent. One-year expectations from all sources remained below the lower bound of the target. Short- and medium-term forward expectations declined slightly since the previous interest rate decision, while long-term expectations remained anchored within the target range.

v  Since the previous interest rate decision, the shekel has strengthened by 0.4 percent in terms of the nominal effective exchange rate. During the same period, the shekel strengthened by 0.5 percent against both the US dollar and the euro. The development of the exchange rate over the period was not uniform: The shekel weakened in September and resumed strengthening in October.

v  The financial markets remained relatively stable. The credit market continues to function with stable interest rates. Following a sharp incline at the start of the crisis, there has been a downward trend in demand for financing on the part of companies, but the rate of companies reporting a serious financing constraint remains higher than it was prior to the crisis, and it increased slightly in September. At the end of September, the outline for deferring payments on bank loans was further extended and expanded, and loans from credit card companies were also included in the deferrals.

v  The global economy improved during the third quarter in view of the decline in morbidity rates and the easing of lockdown policies, which led to an upward revision in the IMF’s forecast. The forecast now projects contraction of 4.4 percent in the global economy in 2020, and growth of 5.2 percent in 2021. In recent weeks, the spread of the pandemic again increased, mainly in countries that eased their lockdowns, which may lead to a halt in the economic recovery. Monetary policy in various countries remained very accommodative, and the central banks continued signaling their preparedness to take nonconventional measures to ease financial conditions.

In view of the magnitude of the crisis’s adverse impact on economic activity, the Committee continues to utilize a range of tools in order to increase the extent of the monetary policy accommodation and to ensure the continued orderly functioning of the financial markets. The Committee will expand the use of the existing tools, including the interest rate tool, and will operate additional ones, to the extent that it assesses that the crisis is lengthening and that it is necessary in order to achieve the monetary policy goals and to moderate the negative economic impact created as a result of the crisis.

 

 

The imposition of the second lockdown in September, following an increase in morbidity, led to a sharp decline in activity and in demand. The intensity of the reaction was not uniform over all industries, and was, in general, more moderate than the decline in activity during the first lockdown. According to a flash survey by the Central Bureau of Statistics, companies reported that there was less of an impact to revenue during the second lockdown than during the first (Figure 7). Data on credit card purchases shows a similar picture: For most of the second lockdown period, the decline in the value of purchases was more moderate than during the first lockdown (Figure 3). Mobility data show a decline in mobility to places of work, commerce, and leisure (Figure 4).

 

During the summer months—following the first lockdown and prior to the imposition of the second lockdown—economic activity in Israel recovered rapidly, as shown by a number of main activity indices. Central Bureau of Statistics flash surveys showed continued improvement in firms’ expectations regarding their volume of activity. In August and September, electricity consumption reached higher levels than during the same period in the previous year. The Composite State of the Economy Index shows that economic activity stabilized during the summer, following negative data at the start of the crisis. Companies Survey data for the third quarter show that the net balance increased to a higher level than during the first quarter of 2020, but its level still reflects a strong contraction of activity. The Business Tendency Survey conducted by the Central Bureau of Statistics shows a similar picture (Figure 2). Goods exports improved in August and September following a sharp decline in July (Figure 5).

 

Labor market data show that prior to the imposition of the second lockdown, the broad unemployment rate stabilized at around 11–12 percent in the first half of September. It jumped to 19 percent in the second half of the month following the imposition of the second lockdown (Figure 8).[1] There were about 470,000 unemployed workers (according to the broad definition) in the first half of September, and the number jumped by about 300,000 in the second half of September due to the imposition of the lockdown.

 

The Bank of Israel Research Department revised its macroeconomic forecast, which outlines two possible scenarios (Figure 1). In the scenario in which control over the pandemic is achieved, GDP is expected to contract by 5 percent in 2020, and the broad unemployment rate is expected to be about 17 percent of the labor force in the fourth quarter, compared with a GDP contraction of 6.5 percent and a broad unemployment rate of about 20 percent in the more serious scenario. In 2021, the greater-controlscenario forecasts GDP growth of 6.5 percent, compared to just 1 percent growth in the more serious scenario. In 2021, the unemployment rate In the greater-control is expected to be 7.8 percent, while In the more serious scenario it is expected to be 13.9 percent. In the first scenario, the deficit is expected to be about 13 percent in 2020 and about 8 percent in 2021, and the debt to GDP ratio is expected to be about 73 percent in 2020 and about 76 percent in 2021. In the more serious scenario, the deficit is expected to be 13 percent in both 2020 and 2021, and the debt to GDP ratio is expected to be 75 percent in 2020 and 83 percent in 2021.

 

The inflation environment remained low. The CPI for August remained unchanged, and the reading for September declined by 0.1 percent. Inflation in the past 12 months is -0.7 percent. Inflation excluding energy, fruits, and vegetables in the past 12 months is -0.4 percent (Figure 10). The negative contribution of the energy components to the CPI moderated, and in the past 12 months, they contributed -0.4 percentage points. Inflation expectations for the coming year from all sources remained below the lower bound of the target range. Expectations derived from the capital market returned to negative territory. In the coming months, the annual inflation rate is expected to remain negative. Forward expectations for the short and medium terms declined slightly since the previous interest rate decision, while long-term expectations remained anchored within the target range.

 

Since the previous interest rate decision, the shekel has strengthened by about 0.4 percent in terms of the nominal effective exchange rate. During the same period, the shekel strengthened by about 0.5 percent against both the US dollar and the euro. The development of the exchange rate throughout the period was not uniform. The shekel weakened in September and resumed strengthening in October (Figure 14).

 

The financial markets remained relatively stable. The credit market continues to function well and interest rates are stable , supported by a variety of measures taken by the Bank of Israel and the Ministry of Finance. There was even a slight decline in the average interest rate to small businesses. The Business Tendency Survey shows that following a sharp increase at the start of the crisis, there has been a downward trend in firms’ difficulties in obtaining bank and nonbank financing, but the rate of companies reporting a serious difficulty remains higher than it was prior to the crisis, and increased slightly in September (Figure 21). At the end of September, the outline for deferring bank loans was further extended and expanded to December 31, 2020, and credit card companies were added to it. As of the end of September, loan payments totaling NIS 9.8 billion have been deferred in the banking system, constituting 16 percent of the credit portfolio. (Figure 23).

The global economy also showed improvement during the third quarter in view of the decline in morbidity levels and an easing of lockdown policies, although with large variance between economies. The improvement in the United States was stronger than in Europe or Japan, and the Chinese economy is particularly good in view of their success in dealing with the healthcare crisis. The improvement in activity also led to an upward revision in the IMF’s forecast, which now projects contraction of 4.4 percent in the global economy in 2020 (compared to a contraction of 4.9 percent in the June forecast). The IMF forecasts growth of 5.2 percent in the global economy in 2021 (compared with 5 percent in the June forecast, Figure 24). In recent weeks, the spread of the disease has again increased, mainly in countries that adopted a policy of easing lockdowns. A continued increase in the spread may lead to increased mobility restrictions and a halt to the economic recovery that has just begun. In response, there was an increase in volatility in the capital markets (Figure 30). Monetary policy in various countries remained very accommodative, and the central banks continued to signal their readiness to take nonconventional steps to ease financial conditions. Oil prices declined to about $43 per barrel, while commodity prices continued to increase (Figure 28).

 

 

The minutes of the monetary discussions prior to this interest rate decision will be published on November 5, 2020. The next decision regarding the interest rate will be published at 16:00 on Monday, November 30, 2020.”

[1] Broad unemployment as defined by the Central Bureau of Statistics, based on Labor Force Survey data, includes the unemployed plus employed workers who were temporarily absent from their jobs due to COVID and those not participating in the labor force who stopped working because of dismissal during the COVID period.

“Monetary Committee decision: The Bank of Israel will increase the government-bond purchase program in the secondary market by NIS 35 billion

 

Further to the Monetary Committee decision of March 23, 2020  to launch an NIS 50 billion program to purchase government bonds on the secondary market, with the goal of easing the credit terms in the economy and supporting economic activity and financial stability, the Monetary Committee decided today to increase the purchase program by NIS 35 billion.

 

The Bank of Israel interest rate is at a very low level and eases  financing needs in the economy. The bond purchases enable the Bank of Israel to impact on the bond yields in the market all along the nominal and CPI-indexed curve, and thus reduce the credit costs over longer terms for companies and households, as a complementary tool to the short term interest rate policy.

 

In view of the crisis continuing to impact Israel and the world, the Committee decided to increase the government-bond purchase program by NIS 35 billion and thus continue to support financing ability in the economy, in view of the strengthening of the coronavirus crisis and its economic effects.

The Monetary Committee will continue to operate the tools at its disposal to the extent necessary in order to implement the extent of monetary accommodation required, and to ensure the continued orderly activity of financial markets in Israel.

The Bank publishes a monthly report on the programs it operates in the financial markets in view of the coronavirus crisis. Through the end of September, government-bond purchases totaled NIS 33.6 billion.”

www.CentralBankNews.info


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