Remarks by Bank of Israel Deputy Governor to members of the Israel Forex Association
. These latter factors increase the likelihood that the pessimistic scenario outlined in the Bank of Israel Research Department’s staff forecast, published at the end of August, will be realized. The worsening on the economic situation is expected to have implications for the fiscal situation as well, since government expenditures are increasing due to the need to provide a response for those adversely impacted by the crisis, with a decline in revenue and an increase in the deficit. It is therefore important that the government manages fiscal policy with a long-term view: The government will not be able to endlessly increase the deficit and the debt without it having an effect on the price at which the government raises debt. The ability to increase the debt during the crisis is based on the fiscal strength the government developed over the years, and government planning must be done with a long-term view. Building the budget is the platform for this.
The Deputy Governor described the monetary policy measures, as well as other measures taken by the Bank of Israel in the financial markets. In the first days of the crisis, in March, the policy measures focused on the need to stabilize the financial markets and enable their orderly operation. The Deputy Governor mentioned that in view of the holdings structure of the institutional investors, the dollar liquidity distress that had prevailed throughout the world at the outset of the crisis put the institutional investors in distress, and the Bank of Israel had to rapidly provide a high volume of foreign exchange liquidity. He emphasized that the institutional investors cannot assume that the Bank of Israel will supply dollar liquidity in any similar future situation, and that they must manage their risks accordingly in this regard.
Later on, as the crisis continued and economic activity worsened, the Bank of Israel acted to ensure that the economy would not fall into a credit crunch, and that the financial system would be able to continue providing the credit needs of households, small and large businesses, and the government. In addition to lowering the interest rate to 0.1 percent, which slightly eased the terms of credit in the short term, the Bank of Israel’s massive intervention in the government bond market influenced the entire yield curve and lowered the costs of medium- and long-term credit to all sectors of the economy. Later on, in order to ensure that the flow of credit to all sectors continued, the Bank of Israel utilized two additional measures:
· A program to provide credit to banks for a three-year term at an interest rate of 0.1 percent, against the provision of bank credit to small businesses. This program complements the important government-backed credit program operated by the Ministry of Finance. The data show that following the decline in outstanding bank credit to small businesses at the beginning of the crisis, there was a recovery following the activation of these programs. In addition, the Banking Supervision Department took a variety of steps to ensure the continued flow of bank credit, chiefly a reduction of capital adequacy requirements and the activation of an outline to defer loan repayments. This outline is the practical equivalent of increasing the supply of bank credit.
· A corporate bond purchasing program. This program operates directly in order to ensure that the large corporations that raise credit in the bond market can continue obtaining credit, and indirectly releases sources of credit to the rest of the business sector. The data show that the program narrowed the corporate bond spreads in a variety of industries, and supported companies’ ability to issue large volumes of bonds despite the crisis.