The Monetary Committee decides on April 6, 2020 to reduce the interest rate by 0.15 percentage points to 0.1 percent
In addition, the Committee decided on 2 additional steps:
- To put a new monetary instrument into operation: Provision of monetary loans to banks for a term of 3 years, with a fixed interest rate of 0.1 percent. The loans are contingent on extending credit to small and micro businesses.
- The expansion of the plan through which repo transactions are carried out vis-à-vis financial entities, so that the agreements can include corporate bonds (in addition to government bonds) as security. This step will strengthen the plan’s support of liquidity and the orderly functioning of the financial markets.
An expanded explanation of these two steps is published in a separate press release.
- The coronavirus crisis halted the trend of growth and the economy has shifted into contraction. More than one-third of the economy is shut down, private consumption is lower by about one-quarter relative to the pre-crisis period, and approximately 1 million workers, 24 percent of the workforce, have claimed unemployment benefits.
- According to the Research Department’s assessment, GDP contracted by approximately 5 percent in the first quarter (quarterly terms). Based on the Department’s macroeconomic forecast, assuming that the main part of the coronavirus restrictions are removed gradually by the end of June, negative growth of approximately 5 percent is expected in 2020, with an unemployment rate of 6 percent (annual average). The beginning of a recovery in the third quarter will lead to growth of 9 percent in 2021, though the unemployment rate is expected to decline gradually and only toward the end of 2021 will it approach the low pre-crisis levels. The debt to GDP ratio is expected to reach about 75 percent in 2020. Note that there is considerable uncertainty regarding the forecast crisis, in view of the lack of clarity about the length and magnitude of the crisis.
- Global growth is expected to contract markedly in 2020, and the spread of the crisis has led to very strong policy responses by central banks and governments. Commodity prices collapsed by tens of percent. In China, a recovery in economic activity is starting to be observed.
- The crisis led to a shock in capital markets in Israel and worldwide, with steep declines in equity prices and an increase in volatility and risk. In Israel, the sharp increase in government bond yields and in corporate bond spreads was halted following measures taken by the Bank of Israel and the halt of mutual fund withdrawals.
- There was exceptional volatility in the exchange rate, against the background of dollar liquidity distress in Israel and worldwide. The swap transactions carried out by the Bank of Israel moderated the volatility, and at the end of the period, the shekel had weakened by 5.8 percent against the dollar and by 3.4 percent in terms of the effective exchange rate.
- The inflation environment that was low even prior to the crisis declined sharply. The 1-year inflation expectations decreased further, but expectations for longer terms remained stable. In the short term there could be difficulty in measuring the inflation rate.
In view of the magnitude of the crisis’s adverse impact on economic activity, the Committee is utilizing a range of tools in order to increase the extent of the monetary policy accommodation and to ensure the orderly functioning of the financial markets. The Committee will expand the use of the existing tools, including the interest rate tool, and will be able to operate additional ones, to the extent that the crisis lengthens and it is necessary to achieve the monetary policy goals and to moderate the negative economic impact created as a result of the crisis.
The coronavirus crisis halted the trend of growth, and in March, the economy started to contract. Approximately 1 million workers claimed unemployment benefits during March, 850,000 more than in February, with 90 percent of them on the basis of being placed on unpaid leave, and the number of people seeking work makes up about 24 percent of the labor force. An analysis of the negative impact on private consumption—in accordance with the magnitude of the Ministry of Health’s limitations on the various consumption items and the weight of each item in the household consumption basket—indicates that private consumption is about 27 percent lower than its pre-crisis level. An industry-by-industry analysis of the impact of the crisis on GDP and employment in the economy’s industries indicates that given the current guidance by the Ministry of Health, the total adverse impact on GDP is about 37 percent. The scope of the shutdown is particularly high in industries in which wages are low, so that the ability of workers in those industries to bear a long shutdown is relatively limited. The same analysis indicates that the negative impact on the labor input is about 45 percent, and in addition to employees who were laid off or were placed on unpaid leave, it reflects the scope of part time work among workers who remain employed or who were placed on paid leave. These estimates suggest that in the first quarter, the economy contracted by 5 percent compared with the previous quarter (in quarterly terms). The Bank of Israel’s Companies Survey points to a sharp decline in the net balance of the business sector, with most industries reporting a sharp negative impact on demand, while the negative impact on supply is focused on the hotels industry (against the background of financing constraints) and construction (a shortage of workers). Based on the Research Department’s macroeconomic forecast, assuming that there won’t be a further increase in the severity of the coronavirus restrictions in Israel beyond those already imposed, and that the main part of the limitations that are barriers to economic activity will be removed gradually by the end of June, the economy is expected to contract by 5.3 percent in 2020, and to grow by 8.7 percent in 2021, though the unemployment rate is expected to decline gradually and only return to the low pre-crisis levels toward the end of 2021. The government budget deficit is expected to increase to 11 percent of GDP in 2020, taking into account the budget plan announced by the government to deal with the crisis and the expected decline in revenues due to a slowdown in activity. The debt to GDP ratio is expected to increase to 75 percent. The Research Department emphasized that the crisis is unprecedented and it is therefore difficult to assess the extent and magnitude of its economic ramifications, and it assesses that a deferral of an additional month in removing the limitations and a further deterioration in world trade will lead to contraction of 8.8 percent in GDP in 2020, and will increase the average unemployment rate for 2020 by 2 additional percentage points.
In March, there were shocks in capital markets in Israel and abroad. Equity market indices in major economies declined by approximately 30 percent, and afterward most of them offset part of the decline against the background of steps by central banks and the governments. Yields in government and corporate bond markets were particularly volatile and there was a sharp rise in risk spreads. In Israel, the Tel Aviv 35 Index declined by approximately 25 percent, and the steep increase in government bond yields and in corporate bond spreads was halted after the announcement of the Bank of Israel’s program in the government bond market and the halt in the trend of mutual fund withdrawals, which at its height reached NIS 8 billion per day.
Before the outbreak of the coronavirus crisis, there was an additional decline in the inflation environment. The CPI declined by 0.4 percent in January and by 0.1 percent in February, so that the year over year inflation rate continued to fall, reaching 0.1 percent, with a moderate decrease in inflation expectations, from all sources, as well. With the outbreak of the crisis, 1-year inflation expectations declined further. While inflation expectations derived from the capital market are apparently impacted by trading conditions in the bond market, there was a decline in expectations from the other sources as well, partly as a result of the rapid decrease in global prices of oil and other commodities. Expectations for longer terms did not change markedly. Although the adverse impact in the supply chain of many goods may lead to price increases from the supply side, the effect of the decrease in demand is apparently more notable, and is expected to lead to a decline in inflation in the coming months. The depreciation will offset the forces for a decline in inflation. However, a methodological difficulty is expected in calculating the CPI and in analyzing the meaning of the inflation rate so long as the strict limitations on economic activity lead to numerous goods and services not being consumed, and their prices not being able to be measured (this difficulty is relevant to 20 percent of the weight of CPI components). There was a sharp change in the composition of households’ consumption basket.
There was anomalous volatility in the exchange rate during March, against the background of the dollar liquidity distress resulting from dollar margin calls after the sharp declines in global equity markets. From the previous interest rate decision through March 17th, the shekel weakened by 11 percent in effective exchange rate terms. However, after the Bank of Israel conducted the shekel/dollar swap transactions, the volatility declined and the shekel weakness moderated to about 5.8 percent against the dollar and 3.4 percent in terms of the effective exchange rate since the previous interest rate decision. The depreciation is expected to support the profitability of exports, particularly manufacturing exports.
Around the world, more than 1 million people have already contracted the coronavirus and tens of thousands have died, and it remains difficult to estimate the magnitude of the negative economic impact. According to assessments by the international institutions, global growth is expected to contract markedly in 2020 and a very sharp decline in world trade is expected, but the range of the forecasts is extremely wide. Sentiment indices also point to contraction in activity. In China, the slowdown in the spread of the virus enabled authorities there to reduce the restrictions on the population, and data indicate a gradual return of economic activity, so that moderate but positive growth is expected in 2020. The spread of the crisis led to a sharp policy response by central banks and governments. Most central banks reduced interest rates markedly and adopted a range of expansionary measures and supply of liquidity to the markets. Governments announced extensive plans to expand public expenditure, compensation for those adversely impacted by the crisis, and the extension of credit to the business sector. The slowdown in economic activity led to a sharp decline in commodity prices, and the price of oil dropped by tens of percent, against the background as well of a lack of agreement between the main oil producers to cut output.
The minutes of the monetary discussions prior to this interest rate decision will be published on April 20, 2020. The next decision regarding the interest rate will be published at 16:00 on Monday, May 25, 2020.