TEL AVIV - Israel's short-term interest rate reduction last week was part of a series of policy steps as the damage to the economy from the coronavirus epidemic became evident, Bank of Israel Deputy Governor Andrew Abir said on Monday.
The central bank on April 6 trimmed its benchmark rate to 0.1% from 0.25%, the first rate cut in five years and matching its all-time low.
The Bank of Israel had earlier appeared content to pursue other tools that centered on financial market stability such as adding liquidity via government bond purchases and foreign exchange intervention while easing banking restrictions.
But the virus has wreaked havoc on Israel's economy. Increasingly stringent restrictions have largely confined Israelis to their homes, forcing businesses to close and causing unemployment to soar to 25%, with more than 1 million people having so far filed for jobless benefits.
"The background to the decision on a rate cut was the realization that the damage to the economy from the shutdown is going to be a lot larger than we originally thought," Abir told Reuters.
"It was part of on an overall package to help out the economy in a difficult period that we are going to go through in the next few months," he said.
The bank's economists estimate that the economy will contract more than 5% in 2020 before bouncing back with growth near 9% next year.
They also project the interest rate staying between 0% and 0.1% in 2020 and moving to a range of 0% to 0.25% in 2021.
In addition to the rate cut, the central bank expanded repo transactions so that the agreements can include corporate bonds, in addition to government bonds, as security.
It is also providing loans to banks for a term of three years, with a fixed interest rate of 0.1%, with the goal of increasing the supply of bank credit to small businesses. The size of the plan will be 5 billion shekels.
These followed shekel/dollar swaps and a decision to buy 50 billion shekels ($14 billion) of government bonds in the wake of a spike in dollar/shekel and in bond yields that subsided after the central bank stepped in.
"The whole set of tools that we've introduced...have been very successful at calming the markets and restoring stability and liquidity, as well as providing relief to households and businesses by lowering borrowing rates all along the yield curve," Abir said.
More than 11,000 Israelis have been infected with the COVID-19 respiratory disease and 113 have died.