Bank of Israel unveils steps to boost liquidity

The central bank will offer longer-term loans in addition to the one-day and one-week monetary loans currently available.

By SHARON WROBEL
December 25, 2008 07:36
2 minute read.
shekels coins 88

shekels good 88. (photo credit: )

The Bank of Israel on Wednesday announced a four-point monetary plan to increase liquidity in the financial system and help stimulate economic growth. "These measures are expected to increase the liquidity available to financial institutions, businesses and households and to reduce its cost," the central bank said in a statement. "The Bank of Israel will monitor the effects of these steps and will examine other instruments, as necessary." Speaking at the annual conference of the Banking Association on Tuesday, Bank of Israel Governor Stanley Fischer urged banks to offer lower interest rates and make credit available to the business sector and private customers in an effort to spur growth in the economy. "Despite the relatively good situation of the Israeli banking sector, the banks have widened the spread between the Bank of Israel interest rate and the rate they are demanding from customers," Ori Greenfeld, a macro-economist at Clal Finance Investment House, said Wednesday. "Since recent interest-rate cuts by the central bank have not helped much to improve the liquidity situation in the market, the Bank of Israel decided to follow in the steps of global central banks and resort to unconventional tools." As part of the monetary measures announced Wednesday, sales of Makam short-term notes will be adjusted to reduce their role in absorbing excess liquidity. "This step will reduce the supply of 'alternative cash' in the capital market and increase the amount of cash [money supply]," Greenfeld said. "The Bank of Israel hopes... the banks will give in and make use of cash funds to offer credit, rather than accumulating them." The central bank will offer longer-term loans and deposits in addition to the one-day and one-week monetary loans and deposits currently available through auctions to the banking system. The spread between the central bank's credit and deposit rates will be cut by half to 0.5 percentage point to offer banks loans at lower cost. The Bank of Israel will allow Repo auctions for commercial banks and institutions to be offered for longer than the current period of one week so that they can use the funds for investments in the economy. "The plan, on the face of it, looks good at providing incentives for banks to start streaming funds into the economy," Greenberg said. "However, the psychological effect and the banks' fear of a deterioration of the crisis will weigh heavily on their position to maintain and secure a high level of liquidity." Bloomberg contributed to this report.


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