The Monetary Committee decides on November 30, 2020 to keep the interest rate unchanged at 0.1 percent

  • The economy is in a prolonged exit process from the second lockdown, but there is uncertainty regarding the continuation of the exit from the lockdown in view of the apparent increase in morbidity. News from abroad regarding progress in vaccine development is positive, but in the meantime, it is unclear when the vaccines will be distributed in Israel and abroad. Until then, morbidity is expected to continue affecting economic activity.
  • The adverse impact on economic activity as a result of the second lockdown was less severe than the impact of the first lockdown, but the exit from the second lockdown has been slower, and there is variance in the adverse impact on activity across various industries. Some firms have been able to adapt their operations to the COVID-19 restrictions, but industries such as tourism, restaurants, education, and leisure are more restricted and have not returned to the pre-crisis levels of activity.
  • The second lockdown led to a sharp increase in the broad unemployment rate, which reached approximately 23 percent of the labor force in the first half of October, compared with about 11 percent in the first half of September. With the start of easing the lockdown, the unemployment rate moderated to approximately 18 percent.
  • The inflation environment remained low. The CPI increased by 0.3 percent in October, and inflation in the past 12 months is -0.8 percent (-0.4 percent net of energy and fruit and vegetables). Inflation expectations for the coming year, from all sources, remain below the lower bound of the target range, but expectations derived from the capital market increased. Forward expectations for the second year returned to within the target range, and long-term expectations remained anchored within the target range.
  • In recent months, the effective exchange rate had been in a relatively narrow range, but since the previous interest rate decision, the shekel has strengthened by about 1 percent in terms of the effective exchange rate, and by about 1.7 percent against the US dollar in view of the significant weakening of the dollar worldwide. Continued appreciation may have an adverse effect on exports, and is expected to lead to a further slowdown in inflation.
  • The credit market continues to function well with low and stable interest rates, supported by a range of measures taken by the Bank of Israel and the Ministry of Finance. The Business Tendency Survey shows that there was a decline in the difficulty of large and medium businesses to raise credit, while small businesses continued to find difficulty in raising bank credit.
  • The global economy recovered in the third quarter, and most economies recorded high GDP growth. However, the renewed spread of morbidity is expected to lead to a moderation of global growth in the fourth quarter. World trade is recovering after having declined sharply at the onset of the crisis. The central banks of the major economies emphasized their commitment to maintaining accommodative policy for a long time, and governments continue to adopt assistance and fiscal expansion measures.


The positive results in coronavirus vaccine tests are increasing optimism regarding the rapid return of the economy to a path of growth in the coming year. However, the adverse impact on the economy, and particularly on the labor market, is expected to be prolonged, and the Committee will therefore continue to utilize 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 it is necessary in order to achieve the monetary policy goals and to moderate the adverse economic impact resulting from the crisis.

 

For the file of figures accompanying this notice, clickhere.​

 

 

The economy is in a prolonged exit process from the second lockdown, but there is uncertainty regarding the continuation of the exit from the lockdown in view of the apparent increase in morbidity. News from abroad regarding progress in the production of vaccines is positive, but in the meantime, it is unclear when the vaccines will be distributed in Israel and abroad. Until then, morbidity is expected to continue affecting economic activity.

 

According to the first estimate of National Accounts data for the third quarter, following the sharp drop in GDP in the second quarter, there was rapid recovery during the summer months until the start of the second lockdown in mid-September, as the economy grew by 38 percent (in seasonally adjusted annual terms; Figure 1) in the third quarter. The growth was driven by exports, private consumption, and investment in residential construction, while investment in industries continued to contract.

 

The available indicators regarding economic activity in October and November show that the adverse impact on economic activity as a result of the second lockdown was more moderate than the impact of the first lockdown, but as a result of the gradual exit, recovery in some of the industries has been slower than following the first lockdown, and there is variance in the adverse impact on activity across various industries. According to the Central Bureau of Statistics Business Tendency Survey, the business sector’s total net balance declined more moderately than in the previous lockdown, but it continues to reflect strong contraction in activity (Figure 3). Electricity usage data also declined only moderately. Manufacturing exports (excluding ships, aircraft, and diamonds, in dollars) increased slightly in October, returning to the level from before the first lockdown, driven by high-technology exports (Figure 7). Google’s data on mobility to workplaces, which declined only slightly during the lockdown, indicate a faster return to the mobility levels of just before the second lockdown, already at the initial stages of the exit from the lockdown, relative to the first lockdown. Credit card expenditure data indicate a similar trend, as some companies in the retail trade and food and beverage services industries adapted their operations to supplying products online and through deliveries. In contrast, in view of the gradual reopening of the economy, some industries such as tourism, restaurants, education, and leisure did not return to their pre-crisis levels of activity (Figure 4).

 

The second lockdown led to a sharp increase in the broad unemployment rate, which reached approximately 23 percent of the labor force in the first half of October (938,000 unemployed), compared with approximately 11 percent in the first half of September. The increase was mainly due to the growth in the number of workers who were temporarily absent from their jobs. In the second half of October, with the start of easing the lockdown, the broad unemployment rate moderated to approximately 18 percent (Figure 9). A Central Bureau of Statistics real-time survey conducted in October shows that there was an increase in the share of those dismissed compared with a survey conducted in August.

 

The Bank of Israel Research Department revised its estimates of monthly activity rates in the economy during the crisis (Figure 2). According to these estimates, GDP is now expected to decline by 4.5 percent in 2020 if there is no significant drawback in removing the restrictions until the end of the year, and by 5 percent if there is such a drawback due to an increase in morbidity. Regarding 2021, a high level of uncertainty remains regarding the forecast in view of the recent increase in the infection coefficient and the probability of additional lockdowns compared to the chances of a vaccine during 2021. The forecast published in October 2020, which contains a scenario of remaining in control and a scenario of "low control”, still covers the range of potential scenarios in the Research Department’s forecast for 2021.

 

The inflation environment remained low. The CPI for October increased by 0.3 percent, inflation in the past 12 months was -0.8 percent (-0.4 percent net of energy and fruit and vegetables) (Figure 10). The energy component contributed -0.5 percentage points to the inflation rate in the past 12 months, while the housing component moderated in the past year, making a positive contribution of just 0.2 percentage points. Inflation expectations for the coming year, from all sources, remain below the lower bound of the target range. Expectations derived from the capital market increased markedly, returning to positive territory. In the coming months, annual inflation is expected to remain negative. Short- and medium-term forward expectations increased since the previous interest rate decision, and expectations for the second year returned to within the target range. Long-term expectations were virtually unchanged, and remained anchored within the target range (Figure 14).

 

The effective exchange rate had been in a relatively narrow range in recent months (Figure 15), but since the previous interest rate decision, the shekel has strengthened by about 1 percent in terms of the effective exchange rate. During the same period, the shekel strengthened by approximately 1.7 percent against the US dollar in view of the significant weakening of the dollar worldwide. The continued appreciation of the shekel could have an adverse impact on exports, and is expected to lead to a further slowdown of inflation.

 

The recent positive results in tests for the development of a COVID-19 vaccine contributed to price increases on global equity markets, as well as to an increase in bond yields. In the domestic market, yields increased on the shekel bond curve similar to the global trend, and corporate bond spreads continued to narrow alongside the price increases on equity indices (Figure 18). The credit market continues to function well with low and stable interest rates, supported by a range of steps taken by the Bank of Israel and the Ministry of Finance. The Business Tendency Survey shows that there was a decline in the difficulty of raising credit by large and medium businesses, while for small businesses the difficulty of raising bank credit remained at its previous level (Figure 22). As of mid-November, loan repayments totaling NIS 10.8 billion in total were deferred as part of the bank credit payment deferral program. The balance of credit for which payments were deferred constitutes 16.4 percent of the credit portfolio. Today the Bank of Israel announced an additional framework for further deferrals and easing of loan repayments, which has been adopted by the banking system, and which focuses on households.  The framework enables customers who have been harmed by the crisis to spread out their consumer and mortgage loan repayments over longer periods, and also provides them with the option of a further deferral of loan repayments to credit card companies.

 

The global economy recovered in the third quarter, and most economies recorded high GDP growth. However, the renewed spread of morbidity and the expansion of lockdowns and restrictions in advanced economies are expected to lead to a moderation of global growth in the fourth quarter. The global Purchasing Managers Index has remained at a level that indicates expansion of activity since July, and reflects recovery both in manufacturing and in services (Figure 27). World trade is recovering after having declined sharply at the start of the year, and recent data reflect a contraction of only about 1.5 percent compared with the same period last year (Figure 26). In the US, morbidity is spreading at a high rate, but economic indicators point to a continued recovery in the fourth quarter. The spread of morbidity and the resumption of lockdowns in Europe are expected to lead to contraction in the fourth quarter, but at a more moderate rate than during the first lockdown. In Japan as well, low growth is expected in the fourth quarter. China’s economy is particularly robust, and is the only one among the large economic blocs where positive growth is expected in 2020. Monetary policy throughout the world remains very accommodative. The central banks of the major economies stressed their commitment to maintaining accommodative policy for a long time, and governments continue to adopt assistance and fiscal expansion measures. In October, inflation declined in all of the blocs, and it is expected to remain low in 2021 as well. Expectations of a recovery in the global economy contributed to an increase in oil prices.

 

 

The minutes of the monetary discussions prior to this interest rate decision will be published on December 14, 2020. The next decision regarding the interest rate will be published at 16:00 on Monday, January 4, 2021, followed by a press briefing by the Governor.