Bank of Israel holds interest rate, warns of coronavirus uncertainty
The outbreak of the coronavirus, the bank said, is casting uncertainty over a range of areas, including future economic activity both in Israel and abroad.
By EYTAN HALONAn Israeli flag flutters outside the Bank of Israel building in Jerusalem(photo credit: REUTERS)
The Bank of Israel kept its benchmark interest rate at 0.25% on Monday, citing prolonged low inflation and economic uncertainty caused by the outbreak of the coronavirus in China.Inflation over the past 12 months was just 0.3%, largely influenced by the strengthening of the shekel and significantly below the target range of 1% to 3%, the central bank said.“Inflation is expected to remain low in the coming months and may even become negative, but it is expected to move back toward the lower bound of the target range in the second half of the year,” the bank’s monetary committee said in a statement. It will be necessary to leave the interest rate at its current level “for a prolonged period or to reduce it” to stabilize inflation around the midpoint of the target range, it added.Since the bank’s previous interest-rate decision in early January, the shekel has continued to appreciate by approximately 3%, which it described as “a development that continues to make it difficult to return inflation to the target range.”According to the bank, the outbreak of the coronavirus is casting uncertainty over a range of areas, including future economic activity both in Israel and abroad, the impact on inflation and on financial markets.Should the spread of the virus be halted in the coming months, then damage to the Chinese economy will be restricted mainly to the first quarter of 2020, the bank said. Growth rates in later quarters are expected to compensate for the damage.“According to the Bank of Israel’s assessment, beyond the impact on specific companies, this scenario is not expected to have a significant macroeconomic effect in Israel, even though China is a significant trading partner in a range of industries,” the bank said. “If the crisis persists and flows over into other countries, and particularly if strict preventive measures will be required in Israel, it is expected to have a more significant impact, the scope of which is difficult to assess at this stage.”GDP grew by 4.8% during the fourth quarter of 2019, encompassing virtually all sectors, according to the first estimate of national accounts data. The government’s interim budget is expected to have a “markedly contractionary effect in the first half of 2020,” the bank said, adding that “uncertainty remains regarding budgetary policy” following the elections and its implications for the economy.While the slowdown in world trade has continued, the bank cited reduced political risks due to the signing of the first stage of a US-China trade agreement and greater certainty surrounding the UK’s departure from the European Union. The central bank will publish its next decision regarding the interest rate on April 6.
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