Rally Counters Covid Wave for Bank of Israel: Decision Day Guide

(Bloomberg) --

The Bank of Israel is expected to leave its key interest rate unchanged on Monday to bolster an economy that’s rallying despite the recent surge in Covid-19 cases.

Investors will also be watching for any updates on the bank’s bond and foreign-currency purchasing programs, two major forms of pandemic relief that are due to be exhausted in the coming months. 

All 10 economists surveyed by Bloomberg expect the base rate to hold at 0.1%.

“There’s almost no chance for any change,” said Alex Zabezhinsky, the chief economist at Meitav Dash Investments Ltd. in Tel Aviv, citing Israel’s improving economic indicators. 

The economy grew by an annualized 15.4% in the second quarter, due largely to the lifting of a coronavirus lockdown in one of the world’s most vaccinated nations. Inflation now sits in the middle of the government’s 1%-3% target range, and unemployment has declined to 9%.

If borrowing costs remain unchanged, then the Bank of Israel would be sending the message that Israel’s monetary policy “will remain expansive for the long term,” said Nira Shamir, chief economist at Israel Discount Bank Ltd. in Tel Aviv. 

The threat of a fourth lockdown could tip the scales toward that decision. The number of daily new cases has soared because of the highly transmissible delta variant. Bank of Israel Governor Amir Yaron told Bloomberg News that a monthlong lockdown could cut Israel’s economic growth by half a percentage point, from 5.5% to 5%. 

“A possible lockdown is a factor that the Bank of Israel will take into consideration and will most likely keep the interest rate unchanged in the foreseeable future,” said Eyal Raz, senior economist at Bank Leumi Le-Israel Ltd. in Tel Aviv. 

Relief Programs

The bank will also soon have to decide whether to expand or halt its virus relief programs. It’s already purchased most of the 85 billion shekels ($26.25 billion) in government bonds it committed to buy to ease credit conditions. 

Some economists expect the bond buying to stop because the economy is improving. Ofer Klein, head of the economics and research department at Harel Insurance & Financial Services Ltd. in Tel Aviv, predicted the Bank of Israel will wait to see what the U.S. Federal Reserve does about its own bond-purchasing program. 

The central bank is also on the verge of using up the last of the $30 billion in foreign currency it committed to buy this year to rein in shekel gains and make exports cheaper for foreign buyers. The pace of purchases has slowed significantly, to just $500 million in July from nearly $7 billion in January.

Yaron has indicated he sees the foreign-currency buying program as a crisis-mode salve, calling it “a special plan for a special situation.” 

At the same time, the program hasn’t resolved exporters’ problems. The shekel has outperformed major peers this year, shored up by a current-account surplus, foreign direct investment in Israeli high tech companies, and hedging activities by institutional investors looking to protect themselves against rising stock prices in the U.S.

“It will be very difficult to stop or even decrease currency buying,” Zabezhinsky said. “The pressure on the shekel is very strong.” 

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