The Bank of Israel said Monday it is leaving its key lending rate unchanged at a record low 0.1 percent, saying that the central bank will continue to conduct a “very accommodative monetary policy” for a prolonged period of time.
The Bank of Israel also issued updates to its 2021 and 2022 macro forecasts, saying GDP will grow by 5.5 percent in 2021 and by 6 percent in 2022, such that the level of GDP at the end of 2022 is expected to be only about 0.5 percent lower than the level that was expected prior to the crisis.
In April, the central bank forecast 6.3% GDP growth this year, as a world-beating vaccination drive kept the coronavirus pandemic in check. Infection rates, however, have started rising again, due to the Delta variant.
“At this stage, the morbidity level is low, but the spread of the disease poses some risk to the continued recovery of the economy,” the central bank said in its Monday statement.
“The return to normal life in Israel supports rapid growth in the coming year,” the central bank said. “However, there are still challenges to economic activity in view of the health risks in Israel and abroad and the impact to the economy, particularly the labor market.”
The central bank’s Monetary Policy Committee “will therefore continue to conduct a very accommodative monetary policy for a prolonged time, using a range of tools as necessary, including interest rate, in order to continue supporting the attainment of policy targets and the recovery of the economy from the crisis, and to ensure the continued orderly functioning of the financial markets.”
Inflation is creeping upward, but is still within the target range, the central bank said, at 1.5 percent. The inflation rate in the coming four quarters (ending in the second quarter of 2022) is expected to be 1.0 percent, and the inflation rate in 2022 is expected to be 1.2 percent. According to this forecast, the monetary interest rate is expected to be 0.1 percent one year from now, the statement said.
Assuming that the national budget passes as planned and that fiscal consolidation is pushed off to 2023, the government deficit in 2021 is expected to be 7.1 percent of GDP and in 2022 is expected to be 3.8 percent of GDP. The debt-to-GDP ratio is expected to be 74 percent in each of those years, the central bank said.
The central bank added that it has decided to end the program providing long-term loans to the banking system against loans to be provided to small and micro businesses on October 1, 2021, or upon the utilization of NIS 40 billion in the program.