Bank of Israel to Pass Baton of Crisis Fight With Rate Near Zero

The Bank of Israel is preparing to cede center stage to fiscal policy after leading the country’s response to the coronavirus pandemic.

As Israel begins to lift restrictions and activity picks back up, central bankers are now urging the government to support the recovery. Although data due Monday will likely reveal a historic contraction in output last quarter and joblessness on the rise, high-frequency indicators like credit cardspending are already showing the economy is turning the corner.

At the height of the outbreak starting in March, the central bank rolled out unprecedented measures including 50 billion shekels ($14.2 billion) worth of government bondpurchases. Weeks later, it cut borrowing costs to all-time lows, unveiled new tools, and even broached the possibility of cutting interest rates yet further.

But all analysts polled by Bloomberg still expect the monetary committee to hold its key rate at 0.1% in its Monday decision. The focus instead is on the kind of message the central bank may send the newly installed government. Governor Amir Yaron said in a cabinet meeting Sunday that the government should avoid restrictive fiscal measures.

21,675 in U.S.Most new cases today

-14% Change in MSCI World Index of global stocks since Wuhan lockdown, Jan. 23

-1.​073 Change in U.S. treasury bond yield since Wuhan lockdown, Jan. 23

-4.​8% Global GDP Tracker (annualized), April

“This is the midst of the crisis, and I think we need to take every possible step to actually try to get as many people back to work as we can,” said Karnit Flug, a former Bank of Israel head now at the Israel Democracy Institute, by phone. “And on fiscal policy that means expansionary policy.”

Israel ended more than a year of political paralysis by swearing in a new emergency government last week, tasked with handling the coronavirus crisis. One of its first jobs will be passing a new budget.

Economists are calling on the new Minister of Finance Israel Katz to focus on tackling unemployment and spend on growth engines like infrastructure to boost the recovery. To cushion the blow to the economy, officials on Sunday approved further spending that brings total fiscal aid to roughly 100 billion shekels.

For more stories on central banks and fiscal policy amid the pandemic:
  • ECB Finally Hears EU Cavalry Coming to Help Its Crisis Fight
  • U.S. Economy May Need More Fiscal Stimulus, Fed’s Kaplan Says
  • RBA’s Lowe Says Recovery Rests Heavily on Scientists’ Shoulders
  • RBNZ Sees No Need to Change Projected Stimulus After Budget

“The main focus of attention is going to be the budget and fiscal policy,” said Leo Leiderman, chief economic adviser to Bank Hapoalim and an economics professor at Tel Aviv University. “For the months to come, the Bank of Israel is more on the sidelines being a companion to all these processes -- but no major changes required in terms of the policy.”

Read more: Israel’s New Finance Chief Could Turn Morass Into Launchpad

Since the last meeting, the central bankrestarted a program of foreign currency purchases intended to weaken the shekel and boost inflation.

Off the Cliff

Before the central bank makes its decision on interest rates at 4 p.m. local time, the country’s statistics bureau is slated to release an initial estimate for first-quarter gross domestic product.

The median estimate of seven economists in a Bloomberg survey is for a seasonally adjusted, annualized decline of 13%, which would be the first contraction since 2012 and the worst quarterly reading in at least 25 years.

Yaron has said he doesn’t expect a V-shaped recovery, with economic activity settling at a lower level after the crisis. Unemployment is estimated at around 5% by the end of 2021, higher than the pre-crisis level of 3.3%, according to the governor.

Still, depending on the length of the crisis, monetary policy makers have left themselves room for further easing. After its last meeting in April, the central bank signaled it could be rethinking its long-held reluctance to push borrowing costs below zero.

Markets and analysts also see some scope for a reduction down the road. One-year interest rate swaps are pricing in a slight decrease over the coming year.

Negative Rates No More Taboo in Israel as Virus Hits Economy

Israel’s real rates are quite high internationally, so there’s a case to be made for cutting them further into negative territory, according to Guy Beit-Or, head of macro research at Psagot Investment House.

— With assistance by Harumi Ichikura

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