BOI Holds Key Rate, Optimistic Over COVID-19 Vaccine

The Bank of Israel held its benchmark interest rate at 0.1% for a fifth straight meeting on Monday, citing optimism that a coronavirus vaccine would help the economy rapidly recover from damage caused by the pandemic next year.

“However, the adverse impact on the economy, and particularly on the labor market, is expected to be prolonged, and the committee will therefore continue 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 bank said in a statement.

Policymakers have preferred to keep the key rate above zero, using bond purchases and other measures to support the economy as unemployment has jumped to more than 20% after two consecutive lockdowns.

It also has been intervening in the foreign exchange market to help stem the dollar’s decline. The U.S. currency has fallen to a 12.5-year low of 3.3 versus the shekel.

“Continued appreciation [of the shekel] may have an adverse effect on exports, and is expected to lead to a further slowdown in inflation,” which stands at an annual rate of 0.8%, the bank said.

The central bank introduced no new measures on Monday after deciding on Oct. 22 to expand government bond purchases while offering loans at low rates to banks to encourage lending to small businesses.

It reiterated that the monetary policy committee would use existing tools, including lowering interest rates, and will operate additional ones if deemed necessary “to achieve the monetary policy goals and to moderate the adverse economic impact resulting from the crisis.”

The bank’s staff updated its forecast for 2020, saying it expected a 4.5% economic contraction. Should the virus crisis worsen and require more restrictions, the economy would shrink 5%, it said. It did not change 2021 estimates for growth of as much as 6.5%.

The Finance Ministry earlier in the day estimated a 2020 contraction of 4.2% to 4.8% and growth in 2021 of 2.4% to 4.5%.

But should the coronavirus worsen and another lockdown be imposed, the economy would contract 4.8% this year while growth in 2021 would only be 2.4%, the ministry said.

In the base scenario, the unemployment rate would average 8.9% next year but reach 12.3% if the health crisis worsens, it projected.

The ministry also foresees economic growth of as much as 4.7% in 2022.