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Low inflation to keep Israeli rates ‘accommodative’ – central bank chief

By on May 10, 2021 0

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JERUSALEM – Israel’s economy is recovering quickly from COVID crisis, but interest rate hikes are quite far away given that inflation is expected to remain well contained, Bank of Israel Governor Amir Yaron said .

Yaron said policymakers began to focus on inflation again after the consumer price index turned positive in March for the first time in a year at an annual rate of 0.2%. The rate should soon enter the official annual target range of 1 to 3% and stabilize around 1.6% over the next few years, based on bond yields.

A key question, the governor said, is how much of the gain comes from bottlenecks in the economy and from supply and demand adjustments.

“We don’t see a risk of an inflation blowout that is detrimental to the economy and therefore allows us to continue to be accommodating and I think it’s going to be very market-based in terms of where and how fast we are. let’s see these processes. go through the economy, ”Yaron told Reuters.

“At some point, depending on economic activity and inflation, depending on financial stability, etc., these will be the considerations that will cause a shift from the main focus to a shift in direction ( interest rates). “

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Israel’s benchmark interest rate has stood at an all-time high of 0.1% for more than a year after a single 15 basis point cut in April 2020 at the start of the pandemic. Despite a spike in unemployment caused by three lockdowns aimed at limiting the spread of the coronavirus, the central bank chose to keep the line on rates, preferring other measures to keep credit flowing, such as buying bonds and low rate loans to banks.

DELAYED REFORMS

The Israeli economy contracted by less than 2.6% than expected in 2020 and Yaron said growth remained on track to reach the bank’s estimate of 6.3% in 2021 “as long as there will be no further detrimental mutation. ” Israel’s economy is almost fully open with more than half of the population fully vaccinated.

“The Israeli economy is rebounding very quickly,” he said. But while the unemployment rate has gradually fallen back to 8% from over 25% last year, pre-virus levels of around 4% may be difficult to achieve as some jobs have been cut as companies are become more efficient thanks to the pandemic.

Yaron called for more training as the economy transforms, but Israel’s political situation is also changing after four inconclusive elections in two years and a fifth election later this year is possible.

Due to political feuds, Israel still uses a pro-rated version of the 2019 state budget that was approved in mid-2018. Yaron said that in the short term, the lack of a budget is not a big problem but that Israel needs reforms in education, infrastructure and regulations that hurt the private sector.

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He said that Israel needs investments of 2% of economic output for several years, especially in education where Israel performs poorly among its peers in the OECD, which will boost the economy of Israel over the next decade.

“Time is money… we are wasting time putting these reforms in place and the gaps are only widening,” Yaron said.

Yet foreign investment in Israel remains strong and has helped bolster the shekel. The Bank of Israel announced in January that it would buy $ 30 billion in foreign exchange in 2021 after buying $ 21 billion last year, but the shekel is only down 1.2% from the dollar so far this year.

In the first four months of 2021, the bank bought nearly $ 20 billion in foreign exchange. “We will not hesitate to expand it if necessary and depending on economic conditions and activity,” Yaron said, dismissing Israel’s foreign exchange reserves close to $ 200 billion as a big problem.

Likewise, Yaron said the bank was in no rush to decide to end its government bond buying program, in which it bought NIS 62.3 billion of the planned 85 billion. He noted that a gradual reduction in recent months was a “function of the markets” and that guidance on his quantitative easing (QE) program would be provided in mid to late summer.

“We’ll know more about where the economy is around the summer,” Yaron said, adding that at its current rate, QE could last another eight months. “We also need to see what is happening (to the economy and bond yields) in the rest of the world.” (Reporting by Steven Scheer; Editing by Toby Chopra)

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