Israel Frets Lasting Unemployment Will Scar Vaccine’s Success

The success of Israel’s high-throttle vaccination drive hasn’t blunted the central bank’s concern that a surge in joblessness will long outlast the pandemic.

The Bank of Israel was upbeat about the economy as it kept its benchmark interest rate on hold at 0.1% on Monday for the seventh consecutive decision. The fast inoculation process, it said, boded well for a rapid return to growth over the coming year.

Yet better-than-expected 2020 growth figures don’t tell the whole story, the monetary committee said in a statement accompanying the decision. “Labor market data reflect the real magnitude of the crisis,” it said, warning that the virus’s “adverse impact on the economy, and particularly on the labor market, is expected to be prolonged.”

Israel Frets Lasting Unemployment Will Scar Vaccine’s Success

Israel is rapidly inoculating its population against the coronavirus, with close to half its 9.3 million people receiving a first shot. That’s allowed officials to begin reopening large segments of the economy this week after a two-month closure, including shops, cultural venues and gyms.

Yet, unemployment data from January showed joblessness levels at 18% when the country was in lockdown, up from about 13% before the closure began, and 3.4% at the start of the pandemic.

“That was the only real negative that they noted,” said Jonathan Katz, macroeconomic strategist for Leader Capital Markets Ltd. “It is something which will have them worried if it doesn’t come down fairly rapidly.”

Israel Frets Lasting Unemployment Will Scar Vaccine’s Success

High unemployment hasn’t kept markets from pricing in greater optimism around the Israeli economy -- or higher borrowing costs.

That reflects a widening sentiment as global vaccination drives pick up. Last week Zambia became the second central bank to hike rates this year, while nations from Poland to Brazil are weighing the possibility.

Investors are beginning to predict interest-rate increases in Israel in the coming two years. Yields on longer-dated Israeli government bonds have also begun to climb.

Israel’s policy makers must also contend with an appreciating currency that led them to announce in January that they would buy $30 billion in foreign exchange to slow the trend.

The shekel has slipped some but still trades near a 25-year high against the dollar set last month. Officials noted in the statement that the currency’s depreciation is expected to support exports and a rise in consumer prices.

Israel Frets Lasting Unemployment Will Scar Vaccine’s Success

The Bank of Israel will likely stay away from interest rates hikes until 2023, given the challenge of reducing unemployment and the expected continuation of forces driving the shekel, Goldman Sachs Group Inc. analysts wrote in a note last week.

Expanding the central bank’s intervention in the foreign currency market is still an option, Governor Amir Yaron has said.

For more: Speaking of EM: Hapoalim’s Hass on Shekel, Vaccines (Podcast)

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