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Business & Finance

Bank of Israel to hold rates as economy poised for steep rebound

  • Rate decision due at 1400 GMT on Monday.
  • Inflation rate at -0.4% in January.
  • Economy contracted 2.4% in 2020, seen growing sharply in 2021.
  • Bank of Israel to buy at least $30 bln of FX to halt shekel rise.
18 Feb, 2021

JERUSALEM: The Bank of Israel is expected to keep short-term interest rates unchanged for a seventh straight meeting next week amid growing optimism that Israel's extensive COVID vaccination programme will lead to a rapid economic recovery this year.

All 15 economists polled by Reuters believe the monetary policy committee (MPC) will keep the benchmark rate at an all-time low of 0.1% when the decision is announced on Monday at 4 p.m. (1400 GMT).

In recent months, a few analysts had expected the rate to fall to zero, despite the central bank's reluctance, but stronger-than-expected economic data from the fourth quarter and 2020 as a whole strengthened the view that the next policy move will ultimately be a rate increase.

Fuelled by a jump in vehicle sales ahead of a tax hike at the start of 2021 and despite a third lockdown, Israel's economy grew an annualised 6.3% to end 2020 on a positive note. The gain followed a 41.5% surge in the third quarter.

For all of 2020, the economy contracted 2.4%, but it was below forecasts of as much as a 3.7% decline due to strong high-tech exports and solid consumer spending despite unemployment of 15%.

Similarly, Israel's inflation rate improved to -0.4% in January from -0.7% in December, although the rate remained well below the Bank of Israel's annual 1%-3% target.

"After the strong GDP and inflation data the chances for a rate cut (on Monday) are really low," said Amir Kahanovich, chief economist for the Excellence Investment House.

Growth is expected to rebound in 2021, with the Bank of Israel forecasting a 6.3% rise while Goldman Sachs sees 7.5% if the rapid pace of Israel's COVID-19 vaccination campaign is maintained.

Israel, with a population of 9.3 million, is starting to emerge from a third lockdown as more than 4 million people have already received a first inoculation and nearly 3 million of them have received a second dose.

At their prior meeting on Jan. 4, five of the central bank's six policymakers voted to hold the key rate.

Since the pandemic began, the central bank has lowered its key rate once - from 0.25% in April - and has signalled an unwillingness to lower rates to zero or make them negative. Instead, the central bank has relied on other measures, such as buying government and corporate bonds and offering cut-rate loans to banks to encourage lending to small businesses.

Last month, in response to a strengthening shekel, which hit a 24-year high versus the dollar, the central bank said it would buy at least $30 billion of foreign currency in 2021 in a bid to help exporters compete better globally. It bought nearly $7 billion of forex in January.

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