Bank of Israel's statement after monetary policy meeting

The economy is in the process of exiting the third lockdown, which, despite its duration, was less strict than the previous lockdowns and had a more moderate than expected impact on economic activity. The vaccination campaign is progressing rapidly but the spread of more contagious variants and the still high morbidity level are weighing on a return to strong economic activity.

GDP contracted by 2.4 percent in 2020, and per capita GDP contracted by 4.1 percent, less severe than had been previously forecasted. Despite the second lockdown in October and the start of the third lockdown at the end of December, in the fourth quarter of 2020 GDP grew by 6.3 percent (2.9 percent net of the effect of vehicle imports). Central Bureau of Statistics real-time surveys conducted in early January indicate an encouraging increase in the share of companies that believe they can continue to exist under the current conditions for more than half a year, with firms' resilience increasing the larger they are.

The broad unemployment rate increased during the third lockdown, to about 20 percent in the second half of January, after having declined to about 13 percent during the period between the lockdowns. It is clear that the unemployment rate during the lockdowns increases mainly in the industries that are significantly impacted by social distancing requirements, such as the hospitality and food services, art and leisure, and education industries.

The inflation environment remains low but continues to trend upward moderately. The CPI for January declined by 0.1 percent, following an identical decline in December, and the inflation rate in the past 12 months was -0.4 percent. In view of the accommodative monetary policy and the global inflation environment, inflation expectations for the coming year from all sources increased, and are around the lower bound of the target range. Expectations derived from the capital market for the first and second years increased markedly. The expectations for medium and long terms remain anchored within the target range.

From the previous interest rate decision until January 14, the shekel strengthened by 3.2 percent in terms of the nominal effective exchange rate. Following the Bank of Israel's announcement on that date regarding the amount of intervention to be executed in 2021, the shekel weakened by 5.2 percent. This trend is expected to support export performance during the exit from the crisis, and a return of inflation to the target range.

The Israeli equity market showed large price increases relative to markets abroad. The credit market continues to function with stable and low interest rates, supported by a range of steps taken by the Bank of Israel and the Ministry of Finance. However, according to the Business Tendency Survey, the difficulty in raising bank credit reported by companies-particularly small ones-is still greater than it was prior to the crisis.

The global economy continues to recover against the background of the decline in the scope of morbidity around the world. The IMF revised its growth forecasts upward, with the global economy expected to grow by 5.5 percent in 2021. Fourth quarter GDP data surprised to the upside in most countries. However, morbidity levels that remained high in some countries, as well as the difficulty in moving forward with vaccinations, are expected to slow the pace of recovery.

The fast pace of the inoculation process in Israel increases the optimism regarding a rapid return of the economy to a path of growth in the coming year. However, the risks to economic activity remain high-mainly in view of the risk of additional morbidity waves due to the spread of the various mutations-and the adverse impact on the economy, and particularly on the labor market, is expected to be prolonged. The Committee will therefore continue to utilize a range of tools in order to increase the extent of the monetary policy accommodation and to ensure the continued orderly functioning of the financial markets. The Committee will expand the use of the existing tools, including the interest rate tool, and will operate additional ones, to the extent that it assesses that it is necessary in order to achieve its monetary policy goals and to moderate the adverse economic impact resulting from the crisis.

The minutes of the monetary discussions prior to this interest rate decision will be published on March 8, 2021. The next decision regarding the interest rate will be published at 16:00 on Monday, April 19, 2021, followed by a press briefing by the Governor.