Rates remain unchanged while further accommodation disappoints

ISRAEL - In Brief 23 Oct 2020 by Jonathan Katz

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The Bank of Israel announced yesterday that policy rates will remain unchanged at a level of 0.1% as widely expected in the market, although several economists (myself included) envisioned the likelihood of a rate cut to zero.The additional accommodative measures were rather weak in scope. An additional 35bn ILS was allocated to the BoI purchasing program (nearly 35bn out of the original 50bn framework was implemented through September), but this came as no surprise. When asked whether the pace of purchases would accelerate in order to flatten the curve, Governor Yaron clearly answered in the negative (unless conditions deteriorated significantly…). He also stated that purchases will continue until signs of a recovery, sometime around mid-2021 (our interpretation). More widely expected by economists was a more dovish forward guidance statement, assuring markets that rates will remain low for several years (as the Fed has done). Yet no change was made in the FG which continues to state: “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.” The one additional monetary measure of any significance was offering 10bn ILS LTRO to the commercial banks at -0.1% interest for 4 years aimed at credit to small and micro firms. We had expected a more significant negative rate of -0.5% at least. There is little incentive for the commercial banks to jump at these four-year loans, with the BoI limiting th...