Central Bank on Standby as Israel Spends Its Way Out of Crisis

(Bloomberg) --

The Bank of Israel wants a primarily fiscal response to the Covid-19 crisis, and will provide support including expanding a record bond-purchasing commitment if needed to keep borrowing costs low.

Governor Amir Yaron said in an interview that while officials have less of a macro-economic buffer to confront a potential second wave, options from lower interest rates to expanding the central bank’s 50 billion-shekel ($14.5 billion) quantitative easing are on the table as needed. At the same time, he said a currency swap program launched during the crisis to ease dollar demand is winding down.

“As long as the spending is supporting specific crisis support, growth and productivity, the rating agencies understand that and Israel will continue to be able to borrow at convenient rates,” Yaron said. “But obviously, the Bank of Israel will be there to be able to provide its support if it’s needed.”

The shekel appreciated 0.1% against the dollar as of 1:37 p.m. in Tel Aviv, while yields on 10-year Israeli government bonds fell 2 basis points.

Central banks from the U.S. to Japan are committing to a longer horizon in delivering stimulus to economies crippled by the pandemic. Some analysts anticipate the Bank of Israel will need to add to its quantitative easing, having already spent 20 billion shekels on purchasing government debt since unveiling the program in March.

Yaron said that it was “too early to tell” if an expansion is necessary and noted the burden from this crisis largely falls on fiscal policy.

Read more: Israeli Cabinet Approves Increase in Coronavirus Crisis Spending

Borrowing costs are low enough already even as the central bank remains on standby to back up fiscal policy, according to the governor. Israel’s 10-year government bonds currently yield around 0.75%, down by about half since mid-March.

Rate Threshold

Israel’s benchmark rate was already cut to 0.1% in April, an all-time low, and policy makers have opened the door to further reductions to zero or below.

In the interview, Yaron -- who had a lengthy career in academia prior to assuming his post in late 2018 -- said that such options were in play.

“Right now, we feel we’re in the right place in terms of monetary policy as a wholesome package,” Yaron said. “A lower rate -- especially as you go into zero and perhaps, farther territory -- could have some also costs to it. And it doesn’t mean that we will not go there if things become very adverse.”

Over the last several months, the Bank of Israel has also purchased billions of dollars in order to weaken the shekel. But thanks to the country’s current-account surplus and foreign investment, the currency still appreciated more than 4% over the past year against the dollar and is trading around pre-crisis levels.

Yaron said that the central bank’s “dynamic window” for the shekel -- used to steer the exchange rate to keep it consistent with price stability and economic activity -- has shifted due to the pandemic.

“The last thing the Bank of Israel wants to see is the export sector having more difficulties than the reduction in world trade, the problems still within the Israeli economy,” Yaron said in a separate interview with Bloomberg Television. “Obviously where we see fit we are not shy of intervening.”

Unsterilized currency intervention, in which the central bank doesn’t insulate its domestic money supply from foreign-exchange transactions, remains a possible tool, Yaron said.

‘Both Ways’

Yaron warned investors that they should take into account the potential for significant currency swings amid deep economic uncertainty.

“The volatility is two-dimensional, it can go in both ways,” Yaron said. “And therefore they should not just count on the Bank of Israel to provide quick dollars, they should do that as part of their risk management in the future.”

Besides posing a risk to exporters, a stronger shekel is also a threat to inflation. Yaron said the crisis is making it increasingly difficult to assess inflation, but that the past two months of negative price growth reflect a shrinking economy. Israel’s expansion should return to 3% when the crisis ends, with inflation rising as well, he said.

Israel began exiting from a near-total lockdown in late April, and the domestic economy has almost totally reopened, bringing with it a new rise in infections. The country has had a total of over 19,000 confirmed cases and more than 300 deaths.

Yaron said any response to a second wave should be localized to maintain as much economic activity as possible. “We do not have as many buffers as we had before,” he said.

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