* Bank of Israel held benchmark rate at 0.1% last week
* C.bank raised government bond purchases by another $10 bln
* Abir: We will be doing QE into 2021
* Abir: Little need for big FX intervention despite strong shekel
JERUSALEM, Oct 26 (Reuters) - The Bank of Israel sees little reason to push its key rate to zero or below given low borrowing costs for consumers and businesses and may not need to boost other stimulus measures, a senior central banker said on Monday.
Bank of Israel Deputy Governor Andrew Abir told Reuters the central bank could hold off with further action if the economy started to recover from the coronavirus pandemic, no more lockdowns are needed and access to credit grows.
He also said there has not been much need for significant intervention in the currency market recently because the shekel has mostly stayed in a fairly narrow range.
The Bank of Israel last Thursday held its benchmark interest rate at 0.1% for a fourth straight decision, while expanding its government bond purchasing and boosting credit to small businesses.
Its next decision is on Nov. 30 and Abir said any further measures likely hinged on the response to previous steps aimed at stabilizing markets, and keeping credit cheap and accessible.
“We need to see how our existing tools are absorbed by the market and how the economy comes out of the shutdown,” Abir told Reuters. “We have a very significant amount of monetary easing already in the system.”
The bank said it would buy up to another 35 billion shekels of government bonds ($10 billion) from a prior 50 billion.
“We don’t want to have a sort of a taper tantrum happening when the QE comes to end and we just cut it off cold turkey,” Abir said. “We’re going to be doing QE for quite a long time -- way into 2021.”
“It’s now more about the access to credit rather than the price of credit,” Abir said. “Interest rates have gone down for virtually all sectors but that’s for companies who have managed to get credit.”
He said policymakers opted not to increase corporate bond buying since spreads are tight and companies are able to tap the market for new issues. “We don’t see any stress in that market,” he said.
At the short end of the yield curve, Israel’s April 2021 bond yields -0.06%, while yields up to two years do not exceed 0.1%. The benchmark 10-year bond yield trades at 0.75%.
Abir said that while in theory pushing the central bank’s benchmark rate to zero or negative should not pose any problems, it might have a psychological impact on investment and savings.
“People’s behaviour may shift just because you have a negative rate, so it could lead into instead of people consuming more, you can actually see them saving,” he said.
While the shekel remains near a 12-year high against the dollar and near an all-time peak against a basket of currencies, Abir said its strength reflected a current account surplus, strong foreign direct investment flows and Israeli economy's resilience during the COVID-19 crisis. (Graphic: tmsnrt.rs/3dVA04B)
“There has been some excess volatility in the short term (and) occasionally sharp intraday moves and we’ve been there to correct that ... We haven’t abandoned the market,” he said.
The central bank has bought more than $14 billion of foreign currencies so far this year, but only $280 million last month.
“September intervention has come down because it just hasn’t been necessary to do that much,” Abir said.
“Intervention is still at our disposal and we use it when we see the rate outside of the window we deem appropriate.”
He also called on the government to pass a 2021 budget “as soon as possible” to help the economy recover. The central bank projects an economic contraction of 5% to 6.5% this year, but growth of 1% to 6.5% in 2021 depending on the need for further lockdowns.
($1 = 3.3769 shekels) ($1 = 3.3787 shekels)
Reporting by Steven Scheer Editing by Tomasz Janowski
Our Standards: The Thomson Reuters Trust Principles.