Israeli monetary policymakers are content with the current level of interest rates and would weigh using other measures to supply credit to the economy before reducing its rate to zero or negative territory, Bank of Israel Governor Amir Yaron said.
The central bank lowered its benchmark interest rate to 0.1% from 0.25% in April and opted to leave the rate unchanged in late May, saying the economic damage from the coronavirus pandemic was likely to be less severe than initially feared.
“We feel there are costs and benefits in lowering further. We feel comfortable where we are given this cost-benefit analysis right now,” Yaron said in an interview with Reuters, adding other factors play into deciding to cut further.
“It doesn’t mean we won’t do it,” he said. “It just means it’s part of a wholesome view of our monetary policy. We have more ammunition under our belt if needed and depending how the crisis develops.”
Yaron said the bank’s main aims were to ensure financial markets function and households have proper access to credit. To that end, the bank took steps to rein in medium- and longer-term bond yields with loans to banks and repo and swap transactions. It also committed to buy 50 billion shekels ($14 billion) of government bonds to bring yields back to near crisis levels.
By easing capital requirements, Yaron also encouraged Israeli banks to give credit and ease loan pay-back terms.
He praised Israel’s leaders in locking down the country early, even though it hurt the economy and sent unemployment soaring. So far, Israel has recorded 302 corona deaths and some 19,000 infected.
Many restrictions have been eased, but the central bank’s base scenario foresees a 4.5% contraction in 2020 and growth of 6.8% in 2021, which Yaron said would still be 2 to 3 points below the 3% growth of the past few years. The jobless rate is expected to improve to 5.5% in 2021 from 8.5% in 2020.
Growth, he said, depended on various factors but for now, the central bank was hopeful the “vibrant” economy with an advanced tech sector would avoid a more pessimistic outcome that would stem from a second wave.
“Until there is a vaccine, there will be a glass ceiling of economic activity,” Yaron said, noting that instead of a “V” shape, the crisis looked more like the ” Nike (NYSE:NKE) logo” in which the recovery in 2021 will take longer. “We need to be creative and find ways to open up segments of the economy.”
Yaron was in favour of the country’s 100 billion-shekel stimulus package, even though it would send the 2020 budget deficit to around 11% of gross domestic product and the debt to GDP ratio to 75%.
“As long as the spending is to support the economy for the crisis … that is spending that the markets will understand. You need to think about it as an investment in minimizing the short-run damage,” he said. “Once the crisis is over, Israel will have to lower its deficits and take care of that structural deficit that has grown in the past.”
The central bank has also been forced to intervene to curb the shekel’s gains. “The last thing we need is for the export sector to face exchange-rate pressures so … we are somewhat less favourable about some of the appreciation that has happened since the onslaught of the crisis,” Yaron said.