The Bank of Israel Monetary Committee decided on Monday to cut its benchmark interest rate from 0.25% to 0.1%, citing the need to ensure the orderly functioning of financial markets amid the coronavirus outbreak.
The cut echoes similar measures taken by the US Federal Reserve, Bank of England and other central banks in recent weeks to limit the outbreak's devastating economic impact.
"The reduction of the interest rate to 0.1 percent will lead to an immediate reduction, even if small, in the costs of credit for households and businesses, and will support the recovery of economic activity in the exit from the crisis," said Governor Prof. Amir Yaron.
"The Bank of Israel will continue to do all that is required and all that it is authorized to do to minimize to the extent possible the adverse impact on the economy and citizens, to assist businesses and households to get through the crisis, and to support the recovery and rapid return of the economy to a path of robust growth and full employment."
The committee had maintained the interest rate at 0.25% since November 2018, when the Bank of Israel surprised analysts by raising the rate from an all-time low of 0.1% after more than three-and-a-half years without change.
Explaining the rate cut, the monetary committee cited the shift of the economy into contraction, the wide-scale shutdown, a major drop in private consumption and one-quarter of the workforce claiming unemployment benefits. The committee added that it is using a range of tools to assist the markets.
"The Committee will expand the use of the existing tools, including the interest rate tool, and will be able to operate additional ones, to the extent that the crisis lengthens and it is necessary to achieve the monetary policy goals and to moderate the negative economic impact created as a result of the crisis," the committee said in a statement.
In its decision, the committee also cited "exceptional volatility" in the exchange rate since the start of the outbreak. Despite swap transactions carried out by the bank to moderate the volatility, the shekel has weakened by 5.8% against the dollar, and by 3.4% in terms of the effective exchange rate.
While still difficult to estimate the magnitude of the negative economic impact, the committee cited international assessments forecasting markedly contracted growth in 2020 and a "very sharp decline" in world trade.
In addition to lowering the interest rate, the bank said it would provide monetary loans to banks for a term of three years, with a fixed interest rate of 0.1%. The bank will also expand a plan through which repo transactions are carried out vis-à-vis financial entities, so that the agreements can include corporate bonds too.
According to a forecast published by the central bank's research department, gross domestic product is project to contract by 5.3% this year, but grow by 8.7% in 2021.
Researchers said that inflation is expected to be -0.8% in 2020, but increase by 0.9% in 2021. While the interest rate at the end of 2020 is expected to be within the range of 0-0.1%, it could return to up to 0.25% at the end of 2021.