Bank of Israel sees strong economic rebound if vaccine rolled out quickly

JERUSALEM (Reuters) -The Bank of Israel expects the economy to rebound quickly in 2021 if the country’s fast start to vaccinating people against COVID-19 is maintained, the central bank said on Monday after keeping rates unchanged.

The bank left its benchmark interest rate at 0.1% for a sixth straight meeting, in line with analysts’ forecasts in a Reuters poll.

Israel has begun to vaccinate its population at one of the quickest rates in the world, and it aims to reach all vulnerable citizens by late January.

The central bank forecast that if the rapid rate of inoculation was maintained, the economy would grow 6.3% in 2021 and 5.8% in 2022.

Growth this year would only reach 3.5%, however, if the vaccination rate slowed, the bank’s economists said in their latest forecasts. The bank said it thought rapid inoculation was most likely.

“However, the risks to economic activity remain high, and the adverse impact on the economy, and particularly on the labour market, is expected to be prolonged,” the bank said in its statement.

“The (monetary) 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 it is necessary in order to achieve the monetary policy goals and to moderate the adverse economic impact resulting from the crisis.”

Instead of lowering interest rates, the bank has taken other measures, such as buying government and corporate bonds and providing cheap loans to small businesses.

In 2020, the economy contracted 3.7% despite two lockdowns, double-digit unemployment and a 12 1/2-year peak in the shekel versus the dollar.

Bank of Israel Governor Amir Yaron reiterated his belief that much of the shekel’s strength lies with global dollar weakness. But he noted that exports have held up well, with the central bank buying a record $20 billion of foreign exchange to prevent an even more rapid appreciation.

“It is difficult to assess the point at which the exchange rate is liable to be too strong for part of the export industries and import substitutes, and this is not a risk we would want to take during a crisis,” he told a news conference. The high level of foreign currency reserves -- $167 billion in November -- would not deter future intervention, he said.

Yaron said that the bank’s accommodative policies would continue despite an expected rapid economic recovery, given very low inflation and as “credit in the economy continues to flow without an increase in interest rates, despite the marked increase in risk for some borrowers.”

Still, he said political instability -- Israel is headed to its fourth election in two years -- is problematic, especially since the lack of a state budget makes it tougher for the government to “take steps to prepare the economy for the post-crisis period.”