Following the Fed, Israel Will Roll Back Stimulus Program
(Bloomberg) -- The Bank of Israel plans to wind up by year’s end an 85-billion shekel ($26.3 billion) bond-purchasing program that supported the economy through the pandemic, tightening monetary policy in lockstep with the U.S. Federal Reserve as inflation rises and the economy recovers.
“Continued economic activity and sound growth will make it possible to end the various quantitative easing programs in the coming months,” the bank said as part of its interest rate decision statement on Thursday. “This is all in order to continue supporting the attainment of the policy targets and the recovery of the economy from the crisis, and to ensure the continued orderly functioning of the financial markets.”
Governor Amir Yaron said at a news briefing that he expects the program to end by November or December, barring unforeseen circumstances. The decision follows the Fed’s announcement last month that it could begin tapering a stimulus plan that added trillions of dollars to the U.S. balance sheet.
While optimistic about the state of the economy, the Bank of Israel defied predictions that it would take a more hawkish approach to borrowing costs. Because challenges to economic activity persist, the bank will “continue to conduct an accommodative monetary policy for a prolonged time,” it said.
Monetary policy makers kept the base rate unchanged at 0.1% on Thursday, as predicted by all 17 economists surveyed by Bloomberg.
Israel’s economy has improved dramatically since the beginning of 2021, growing by 16.6% in the second quarter as the country bounced back from a government-imposed lockdown. Meanwhile, inflation has risen fast, touching an eight-year high of 2.2% in August, fueled by disruptions to the global supply chain and an increase in commodity prices.
Israel’s Second Quarter Growth Revised Up to 16.6% Annualized
The bank raised its inflation target for 2021 to 2.5%, and its economic growth target to 7% on the back of the recovery. The economy is expected to expand 5.5% in 2022, with inflation declining to 1.6%.
“The main risk to the forecast is the possibility of additional waves of morbidity that will require severe limitations on activity,” Yaron said.
“Such a scenario would be expected to reduce growth by about one percentage point in 2022,” he added.
The Bank of Israel announced on Thursday that it had bought about $1 billion in foreign reserves in September, bringing total purchases in 2021 so far to $28.3 billion -- $1.7 billion short of the $30 billion it earmarked this year to rein in the shekel.
“When the bank’s program ends, it will act in the foreign exchange market as needed, taking economic activity into account,” Yaron said in his speech, reiterating his previous comments on the issue.
The shekel strengthened after the rate decision, trading up 0.2% against the dollar at 3.2308 at 4.24 p.m. in Tel Aviv.
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