Israel’s central bank left its main interest rate unchanged at 0.10 percent and while its staff now sees less of a economic contraction this year than last month, the monetary policy committee still left the door open for further easing if the crises were to continue.
In April the Bank of Israel (BOI) cut its key rate for the first time in five years in response to the economic slowdown from measures to contain the COVID-19 pandemic and has also been using a range of other monetary tools to boost accommodation and ensure the orderly functioning of 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 crises is lengthening and it is necessary to achieve the monetary policy goals and to moderate the negative economic impact created as a result of the crises,” BOI said.
But compared with its last policy statement in April, BOI staff is more upbeat as some of the restrictions imposed to contain the spread of the coronavirus have been lifted.
Real time data point to a recovery of economic activity in some industries, though activity is still low and in other industries where limitations have not been removed, activity remains around the lowest level.
In a special update to its economic forecast, the bank’s staff now sees an economic contraction this year of 4.5 percent, less than April’s estimate of a 5.3 percent contraction.
In 2021 Israel’s gross domestic product is seen expanding 6.8 percent, down from April’s forecast of 8.7 percent, assuming there won’t be another wave of infections and restrictions.
BOI said the first estimate of gross domestic product in the first quarter shows an annual 7.1 percent contraction.
The gradual removal of restrictions after the Passover holiday is reflected in economic activity but the recovery is expected to take a long time and the adverse impact will be notable, BOI said.
Israel’s shekel was volatile in March, plunging just over 9 percent from March 1 to March 18 before the central bank offered $15 billion in currency swaps, helping the shekel firm so it was only down 2.8 percent by the end of the month against the U.S. dollar.
This month it has been more stable, trading at 3.52 to the dollar today to be down 1.7 percent since the start of the year.
BOI noted the shekel was now back to its pre-crises level, saying “to the extent that the exchange rate stabilizes at this level, it will weigh on the recovery of exports, particularly in view of the decline in global demand, and on the return of inflation to within the target range.”
Israel’s inflation rate has decelerated sharply, with consumer prices down 0.6 percent in April from zero percent in March. In April BOI’s staff forecast inflation this year would average a negative 0.8 percent before rising to a positive 0.9 percent in 2021.
The fall energy prices has put downward pressure on inflation worldwide and BOI said short-term inflation expectations are below its target range of 1.0 to 3.0 percent while medium and long-term expectations are within its range.
“At this point, there are no signs of an inflationary impact from the adverse shock to supply,” BOI said, adding the crises has made it more difficult to calculate and analyze the meaning of changes to prices.
The Bank of Israel published the following statement:
Bank credit has increased during the course of the crisis, primarily in light of the growth in business credit and in mortgages, but credit to small businesses and consumer credit declined. The activity of the funds to extend credit to small and medium sized businesses, with partial · government guarantees, led to a decline in the average interest rate on credit to small businesses. After a halt in issuance in the corporate bond market in March, there was a recovery in the issuance in April and May.
According to the Research Department’s staff forecast, the scope of the economy’s shutdown, which was estimated to be approximately 36 percent of activity at the peak of the crisis, decreased to approximately 19 percent in the middle of May in view of the removal of the restrictions (Figure 4). Indicators of private consumption show a recovery; data on credit card purchases indicate an increase in the scope of purchases in most industries in which the strict limitations were removed, to close to the pre-crisis level. In industries in which the main limitations have not yet been removed (such as tourism, restaurants, education and leisure), the level of purchases remains near the lowest point (Figure 3). Indicators of the public’s mobility show an increase in the scope of mobility to workplaces, retail and recreation, beginning in mid-April (Figure 7). Goods exports declined sharply in March and April. Goods imports contracted as well, but the import of raw materials remained stable in view of the adverse impact on manufacturing being relatively moderate (Figures 8-9). Data on services exports are still not available for the crisis period but a sharp decline is expected in exports of tourism and transportation services. The Business Tendency Survey indicates a deterioration in the economic situation in March and April, in addition to an increase in companies’ difficulty in attaining credit (Figure 2).
There is a continued decline in the inflation environment, and at this stage, no inflationary impact is seen from the negative shock to supply. The March and April CPI readings were slightly higher than expected—the CPI for March increased by 0.4 percent and the CPI for April decreased by 0.3 percent, but the rate of inflation over the past 12 months declined sharply to a negative rate of 0.6 percent, mainly due to the significantly negative contribution of the energy component (Figure 12). The annual inflation rate measured by the CPI excluding energy and fruit and vegetables continued its downward trend, and in April it was 0.2 percent. There is a methodological difficulty in calculating the CPI and in analyzing the meaning of measured changes in prices so long as the strict limitations on economic activity lead to numerous goods and services not being consumed, and their prices not being able to be measured, and there is a sharp change in the composition of households’ consumption basket. One-year inflation expectations from most sources continued their trend of decline until the middle of May. In recent days, there was a slight increase, but they are all lower than the target. There was some increase in expectations derived from the capital market for the second year, and those expectations for medium and longer terms did not change markedly and they are anchored within the target range. Since the previous interest rate decision, the shekel strengthened by 2.2 percent in terms of the effective exchange rate, and the exchange rate is similar to its pre-crisis level (Figure 15). To the extent that the exchange rate stabilizes at this level, it will weigh on the recovery of exports, particularly in view of the negative impact on global demand, and on the return of inflation to within the target range.