Bank of Israel holds key rate at 0.1%, concerned over new COVID-19 variants

JERUSALEM (Reuters) – The Bank of Israel left its benchmark interest rate at 0.1% for a seventh straight meeting on Monday, citing optimism that the rapid pace of the country’s COVID-19 inoculation programme would boost economic growth this year.

Israel this week started emerging from a third lockdown of nearly two months that the central bank said had a more moderate impact on economic activity than previous rounds.

About half of Israel’s 9.3 million citizens have been vaccinated, providing optimism over a return to growth, but the central bank stressed that the risks to the economy remain high.

“The vaccination campaign is progressing rapidly but the spread of more contagious variants and the still high morbidity level are weighing on a return to strong economic activity,” the bank said in a statement.

Despite a jobless rate of some 15%, Israel’s economy contracted an estimated 2.4% in 2020, well below the central bank’s 3.7% forecast.

It projects a 6.3% spurt in 2021 if the pace of vaccinations is kept up, noting that surveys show an increasing number of firms believe they can continue to exist under the current conditions for more than half a year.

Inflation, the Bank of Israel said, remains low at -0.4% in January but continues to trend higher and could reach 1% — the bottom of an official 1%-3% annual target — in a year’s time.

All 15 economists polled by Reuters had said they expected the monetary policy committee to keep rates steady after doing so ever since cutting them from 0.25% early last April.

Central bank officials have expressed reluctance to lower the key rate to zero or into negative territory despite a strong shekel and three lockdowns. They prefer to use other measures to stimulate the economy such as buying currency and government and corporate bonds.

Following a spike in the shekel to a 24-year peak versus the dollar in the 10 days after the prior decision on Jan. 4, the central bank said it would buy at least $30 billion of foreign currency in 2021 — leading to the dollar gaining to 3.26 shekels from 3.11.

“This trend is expected to support export performance during the exit from the crisis, and a return of inflation to the target range,” the Bank off Israel said.

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