Bank of Israel leaves rates unchanged, sees less economic damage in 2020

JERUSALEM (Reuters) - The Bank of Israel left its benchmark interest rate ILINR=ECI at 0.1% on Monday, saying economic damage from the coronavirus outbreak was likely to be less than initially feared.

“The gradual process of removing the restrictions that the government imposed on movement and activity is beginning to be reflected in economic activity, though the adverse impact on the economy is still considerable and is expected to persist,” the central bank said.

After weeks of a lockdown, during which jobless claims soared, Israel has eased restrictions. Schools and shopping malls have reopened and restaurants will reopen this week.

In an updated forecast, the Bank of Israel projected Israel’s economy would contract by 4.5% this year. It had estimated -5.3% on April 6, when it cut its key rate from 0.25% for its first rate reduction in five years.

In 2021, the central bank foresees economic growth of 6.8%, compared with a previous estimate of 8.7%, assuming no additional waves of infections.

Analysts doubt the central bank will move to zero or negative interest rates, even though deflation of -0.5% is forecast for 2020. The bank’s own economists believe that in a year’s time, the key rate will be in a range of 0 to 0.1%.

The economy contracted an annualised 7.1% in the first quarter due to declines in consumer and state spending, exports and investment, and the annual inflation rate fell to -0.6% in April. More than 1 million people had filed for jobless benefits although nearly 200,000 have already returned to work.

“The unemployment rate at the end of 2021 will be higher than what it was just prior to the crisis,” the bank said.

It reiterated it was using a range of tools — like foreign exchange intervention and buying bonds — to increase monetary expansion and will “expand the use of the existing tools, including the interest rate tool, and will operate additional ones ... to moderate the negative economic impact created as a result of the crisis.”