The members of the Monetary Committee explain why the interest rate remained unchanged

The recovery of the global economy, the rising Israeli stock market relative to the world markets, the well-functioning credit market, the contraction in GDP that beat forecasts, and more • These are the reasons why the Bank of Israel Monetary Committee decided to leave interest rates unchanged at 0.1%

Amir Yaron Governor of the Bank of Israel at a Labor Meeting Photo: Jonathan Cindel, Flash 90

The Monetary Committee decided on 22 February 2021 to leave the interest rate unchanged at 0.1%.

The explanatory memorandum accompanying the decision stated that the economy is in the process of exiting the third closure, which despite its length was less tight than previous closures and its impact on economic activity was milder than expected. Vaccination progresses rapidly but the spread of more contagious mutations and the still high level of morbidity make it difficult to return to increased economic activity.

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GDP in 2020 shrank by 2.4%, and in terms of GDP per capita by 4.1%, Less than the contraction that was predicted. Despite the second closure in October and the entry into the third closure at the end of December, in the fourth quarter of 2020 GDP grew by 6.3% (2.9% less the effect of vehicle imports). The CBS flash surveys conducted in early January indicate an encouraging increase in the proportion of companies that believe they can continue to exist in the current conditions for more than six months, as the resilience of firms increases with their size.

The broad unemployment rate rose during the third closure, reaching about 20% in the second half of January after falling to about 13% in the period between the two closures. It is evident that the unemployment rates in closures increase mainly in those industries that are far more affected by the requirements of distance, such as the hospitality and food services industries, arts and leisure and education.

The inflation environment has remained low but a moderate upward trend continues; The January 2021 index fell by 0.1% after falling by the same rate in the December 2020 index, and inflation in the last twelve months stands at 0.4%. Against the background of the expansionary policy and the global inflation environment, inflation expectations for the coming year from all sources have risen and are in the vicinity of the lower limit of the target. Capital market expectations for the first and second years have risen significantly. Medium- and long-term expectations remained anchored within the target range.

In addition, the committee members note that, since the previous interest rate decision until January 14, the shekel has strengthened by 3.2% in terms of the effective exchange rate. Following the Bank of Israel’s announcement on this date regarding the scope of intervention in the foreign exchange market in 2021, the shekel weakened by 5.2%. This trend is expected to support export performance in the exit from the crisis, and the return of inflation to the target range.

The Israeli stock market recorded high price increases relative to the world. The credit market continues to function with stable and low interest rates, supported by a variety of measures by the Bank of Israel and the Treasury. However, according to the trend survey, the difficulty reported by businesses – and in particular small ones – in raising bank credit is still high compared to the eve of the crisis.

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The global economy continues to recover against a background of declining global morbidity. The IMF has updated its upward growth forecasts – in 2021 the global economy is expected to grow by 5.5%. GDP data for the fourth quarter came as a pleasant surprise in most countries. At the same time, in some countries the level of morbidity remains high, as well as the difficulty in the progress of vaccination operations is expected to moderate the rate of recovery.

In conclusion, the committee members noted that “the rapid pace of the immunization process in Israel increases the optimism regarding a rapid return of the economy to a path of growth in the coming year. However, the risks to activity are still high – especially in view of the risk of further waves of disease following the spread of the various mutations – and the damage to the economy and in particular the labor market is expected to be prolonged. Therefore, the Committee will continue to use a variety of tools to deepen the degree of expansion of monetary policy and ensure the continued proper functioning of financial markets. The committee will expand the use of existing tools, including the interest rate tool, and will use additional tools, as long as it deems it necessary to achieve the objectives of monetary policy, and to mitigate the economic damage created as a result of the crisis. “