Bank of Israel Plays Down Rate Cut and Keeps Focus on Market

(Bloomberg) -- The Bank of Israel is focused on market operations to support the local economy through the coronavirus outbreak instead of joining a global wave of interest-rate cuts.

“In the present situation, I don’t think rates are a particularly significant tool,” Deputy Governor Andrew Abir said in a phone interview Tuesday. Cutting the benchmark rate from its current 0.25% to 0.1% “might have a signaling effect, but it’s only a signaling effect if you put other tools in place.”

The Bank of Israel’s reluctance to cut rates below zero means it has to rely more on its other tools while many of its global counterparts bring borrowing costs ever lower. But instead of stabilizing jittery financial markets, some of the recent emergency actions taken by central banks including the U.S. Federal Reserve have only added to investor panic.

Israel’s central bank already re-started government bond purchases for the first time since 2009 and launched dollar-shekel swaps as part of efforts to boost liquidity this week. Abir said those are the two areas of potential illiquidity that are now most in focus for officials.

After sliding over 3% against the dollar Tuesday, the shekel recovered some of its losses and traded 1.7% weaker at 3.8317 as of 4:12 p.m. in Tel Aviv. Israel’s currency is down almost 10% for the year, more than wiping out its gain in 2019.

Recent events haven’t altered the central bank’s stance on the potential of negative rates, Abir said. Some economists expect a reduction to 0.1% in the next decision at the start of April.

The central bank purchased 400 million shekels ($103.6 million) of government bonds on Sunday and 1.9 billion shekels on Monday, and is supplying liquidity through currency swaps worth several billion dollars, Abir said.

‘Natural Correction’

Israel’s currency has massively depreciated since the outbreak, amid fears of a global slowdown and an assessment by Finance Ministry officials that the economy could come to a standstill or even go into contraction.

Israel also faces a widening budget deficit, and the political system remains mired in paralysis after a third election in less than a year produced another deadlock.

The shekel’s weakening is a “natural correction” after the currency was among the strongest against the dollar last year, Abir said.

The central bank has paused its program of purchasing foreign currency to weaken the shekel, Abir added.

The Bank of Israel began heavily spending on foreign currency purchases late last year, shelling out billions to weaken the shekel after its appreciation began to choke off inflation.

“It’s understandable, we don’t see that market being out of control,” Abir said. “We have not been operating in that market for a while.”

Abir also said that he was relatively unconcerned about a downgrade to Israel’s credit rating.

“Israel, relatively speaking, is in a good situation,” he said. “We entered this crisis with very good fundamentals so I think in that respect I’m less worried about our credit rating.”

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