In addition, the Monetary Committee decided to launch a program for purchasing corporate bonds in the secondary market, renew the program to increase the supply of credit to small and micro businesses, and create an infrastructure for increasing the variety of assets that the banks can provide as collateral against this program. A press release on these measures is being published separately.
v The process of removing restrictions has led to an improvement in economic activity, but the level of activity remains low. The increase in the number of new cases of corona in recent weeks is weighing upon the economic recovery process. The removal of restrictions led to an increase in supply, but the level of demand in the economy remains low. According to the Research Department’s assessment, the scope of the economic shutdown has narrowed from about 36 percent of activity at the height of the crisis to about 12 percent. The Research Department’s assessment is that the economy will contract by about 6 percent in 2020, assuming that there is no further worsening of the restrictions on activity. An analysis conducted by the Research Department shows that between 650,000 and 720,000 workers remain unemployed, either on unpaid leave or dismissed from their workplace, due to the corona crisis.
v The difficulty in halting the pandemic in various countries, and the delay in the return to routine economic activity are weighing on the recovery of the global economy, and the international financial institutions have sharply lowered their growth forecasts. The governments of many countries are operating wide-scale assistance programs in order to moderate the negative impact of the crisis and incentivize economic activity. Following the recovery from the peak of the crisis, the capital markets remain volatile, and are supported by unprecedented measures taken by central banks around the world.
v The main share indices on the Tel Aviv Stock Exchange declined in line with the S&P500 at the start of the crisis, but the recovery has been more moderate than in other indices around the world. Corporate bond spreads have also started to widen again recently.
v The Business Tendency Survey indicates some moderation in companies’ difficulty in obtaining credit, but the constraint remains greater than it was prior to the crisis. The volume of bank credit issued during the crisis was higher than it was during the same period last year, particularly regarding credit to medium and large businesses and housing credit. Data on the fund for government-backed credit to small businesses indicate high demand for credit.
v The shekel strengthened since the last interest rate decision by about 1.2 percent in terms of the nominal effective exchange rate. The exchange rate is making the recovery of exports difficult, particularly in view of the decline in global demand, and is weighing on the return of inflation to the target range.
v There is a continued downward trend in the inflation environment, with inflation significantly lower than the lower bound of the target range. In the coming months, annual inflation is expected to remain negative. Forward expectations of inflation at the end of the second year are slightly below the lower bound of the target range, while longer-term expectations are anchored within the target range.
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 continued orderly functioning of the financial markets. The Committee will expand the use of the existing tools, including the interest rate tool, and will operate additional ones, to the extent that it assesses that the crisis is lengthening and that it is necessary in order to achieve the monetary policy goals and to moderate the negative economic impact created as a result of the crisis.
For the file of figures accompanying this notice, 
clickhere.
The coronavirus crisis led to an unprecedented contraction in the scope of economic activity and to a steep increase in the number of jobseekers. Following the Passover holiday, the government started a gradual process of removing the restrictions on movement and activity, and this led to an improvement in economic activity. However, the level of activity remains low. The increase in corona infections in recent weeks is weighing down on the economic recovery process. The removal of the restrictions led to growth on the supply side of the economy, but the level of demand remains relatively low, as shown by a number of indicators. Electricity consumption remains low despite the removal of most restrictions on business activity (Figure 6 in the attached data file), credit card purchases are about 10 percent lower than the pre-crisis average (Figure 7), real time surveys conducted by the Central Bureau of Statistics show improvement in employment alongside a continued negative impact on revenue (Figures 4–5). The index of mobility to places of work stabilized in the first half of June at a level that is still lower than it was prior to the crisis, and declined toward the end of June despite the fact that no new restrictions had been imposed up to that point (Figure 8).
According to the Research Department’s staff forecast, the scope of the economy’s shutdown, which was estimated to be approximately 36 percent of activity at the peak of the crisis, continued to decline as restrictions were removed, and is now approximately 12 percent (Figure 3). Goods exports continued to recover in May following the sharp decline in March, but remain lower than they were prior to the crisis. All components of goods imports declined in May, including the import of raw materials, which was stable in March and April. Services exports declined sharply in March and April in view of the sharp decline in exports of tourism and transportation services, and despite continued growth in the export of business services (Figures 10–11). The Companies Survey indicates a sharp decline in business sector activity in the second quarter, and the Business Trends Survey shows only a slight improvement in June compared with April and May (Figure 2).
Despite the difficulty in precisely assessing the state of the labor market in view of the wide variance in data from different sources, all the data show that the recovery in economic activity is only partially reflected in the labor market. Following the sharp decline in employment in March–April, there was an improvement during May, but the pace of improvement slowed in June. An analysis conducted by the Research Department based on real-time surveys by the Central Bureau of Statistics shows that between 500,000 and 570,000 workers remain on unpaid leave or were dismissed from their jobs due to the corona crisis, in addition to about 150,000 workers who were unemployed prior to the crisis.
The Research Department updated its macroeconomic forecast. The growth forecast for 2020 was revised downward, and GDP is expected to contract by about 6 percent in view of worsening morbidity data that are increasing the uncertainty and weighing on the return to routing economic activity, and in view of developments abroad. In view of the worsening of the growth forecast for 2020, the forecast for 2021 was revised upward, to 7.5 percent (Figure 1). In 2020, the government budget deficit is expected to be about 12 percent of GDP, as a result of the loss of about NIS 55 billion in income due to the slowdown in activity, and an increase of about NIS 60 billion in expenditures in order to finance unemployment benefits and assistance measures announced by the government.
There is a continued downward trend in the inflation environment, with inflation significantly below the lower bound of the target range. The May CPI reading declined by 0.3 percent, and negative year-on-year inflation of 1.6 percent was recorded, mainly in view of the significant negative contribution of the energy component (Figure 12). The year-on-year inflation rate measured by the CPI excluding energy and fruit and vegetables was -0.5 percent (Figure 13). There is a methodological difficulty in calculating the CPI and in analyzing the meaning of measured changes in prices so long as the limitations on economic activity lead to certain goods and services not being consumed and their prices not being measurable, and due to the change in the composition of households’ consumption basket. One-year inflation expectations from all of the sources in June were higher than in May (Figure 15), but developments during the period were not uniform. Inflation expectations derived from the capital market declined since the second week in June, and continued to decline after the publication of the May CPI reading, while projections by professional forecasters increased slightly following the CPI publication. In the coming months, year-on-year inflation is expected to remain negative. Forward expectations for inflation at the end of the second year are slightly below the lower bound of the target range, and expectations for longer terms are anchored within the target range. Since the previous interest rate decision, the shekel strengthened by about 1.2 percent in terms of the nominal effective exchange rate. The exchange rate is delaying the return of inflation to the target range, and making the recovery of exports difficult.
The Bank of Israel’s activity in the financial markets reduced the strong volatility in the markets at the outbreak of the crisis, and in particular, significantly lowered the yield on government bonds and on corporate bonds. With that, corporate bond spreads again expanded recently (Figures 19–20). The volatility in the equity markets continued. The main indices on the Tel Aviv Stock Exchange declined in line with the S&P 500 index at the start of the crisis, but the correction has been more moderate than in other indices around the world.
The Business Tendency Survey indicates some moderation in companies’ difficulties in obtaining credit, but the constraint remains higher than it was prior to the crisis. The volume of bank credit issued during the crisis was higher than the volume issued during the same period last year. Most of the growth was in credit to medium and large businesses and in housing credit. The government increased the volume of the fund for the provision of government-guaranteed credit to small and medium businesses by a further NIS 4 billion. The total size of the fund is NIS 18 billion, and requests for credit from the fund totaling about NIS 47 billion have been received (Figure 23). In addition, a NIS 4 billion fund with greater backing has begun operating to provide credit to companies at high risk. The banking system deferred payments for about 530,000 loans, totaling about NIS 6.8 billion to mid-June (Figure 24). There was an increase in consumer credit taken out by households in May following a sharp decline in April.
The difficulty in stopping the pandemic in various countries, and the delay in the return to routine economic activity are weighing on the global economy. Global GDP contracted sharply in the first quarter, particularly in the major economies, and indicators for April and May point to an even more significant contraction in the second quarter. The Purchasing Managers Indices indicate some recovery, but they remain below 50, which is the range indicating contraction of economic activity (Figure 27). The International Monetary Fund, the World Bank, and the OECD sharply lowered their growth forecasts and forecasts of world trade (Figure 25) for the next two years, in view of the continued spread of the pandemic and the slow removal of the closures, so that in 2020, global GDP is expected to contract more sharply than at any time since the aftermath of the Second World War, partly due to the spread of the virus to emerging markets as well. Following the recovery from the peak of the crisis, the capital markets have remained volatile, and are supported by unprecedented measures taken by central banks around the world. The governments of many countries are operating wide-scale assistance programs in order to moderate the negative impact of the crisis and incentivize economic activity. In view of the extension of the cut in oil production by OPEC member countries, the price of oil increased during the period, but remains significantly lower than it was at the beginning of the year (Figure 29).
The minutes of the monetary discussions prior to this interest rate decision will be published on July 20, 2020. The next decision regarding the interest rate will be published at 16:00 on Monday, August 24, 2020.