Bank of Israel Leaves Interest Rate Unchanged as Economy Exits Pandemic

Governor of the Bank of Israel, Professor Amir Yaron. (Yonatan Sindel/Flash90)

The Bank of Israel Monetary Committee, headed by Governor Prof. Amir Yaron, decided on Monday to keep the interest rate unchanged at its historic low of 0.1%, as expected.

It was the eighth consecutive time the central bank has done so.

The BoI cited improving economic conditions. “The Israeli economy is recovering at a rapid pace, following the exit from the third lockdown,” it said in a statement. “The effectiveness of the vaccination program has led to a sharp decline in morbidity rates, and has allowed a broad relaxation of the limitations on activity.”

The bank’s Research Department’s staff forecast projects that GDP will grow by 6.3% in 2021, the same as its previous forecast for an optimistic scenario regarding Covid-19.

The unemployment rate is expected to decline to 7.5% by the end of 2021. In 2022, growth of 5% is expected, so that the level of GDP in 2022 is expected to be only 1.4% lower than the level that had been expected prior to the pandemic. The unemployment rate in 2022 is expected to continue to decline, to about 6% in the fourth quarter of the year, still higher than the pre-crisis level.

In its report, the BoI added, “The inflation environment remains low, but a moderate upward trend continues. The CPI increased by 0.6% in March, following an increase of 0.3% in the February CPI – both higher than expected -and inflation in the past 12 months is 0.2%. Inflation expectations for the coming year from all sources increased, and are at the lower bound of the inflation target range (1%-3%). Medium- and long-term inflation expectations are anchored within the target range.

Regarding the shekel, “Since the previous interest rate decision, the shekel strengthened by 1% in terms of the nominal effective exchange rate and against the euro, while it weakened by 0.4% against the dollar.

The budget deficit is expected to lessen to 8.2% of GDP by the end of 2021, from 11.6% at the end of 2020.

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