Israel central bank expands bond market intervention, holds interest rates

JERUSALEM (Reuters) - Bank of Israel Governor Amir Yaron said risks to the economy were rising due to a resurgence in COVID-19 cases, but the central bank opted to focus on calming financial markets and ensuring the low cost of credit instead of lowering interest rates.

The central bank on Monday as expected held its benchmark interest rate ILINR=ECI at 0.1% and forecast an economic contraction of 6% in 2020, compared with its previous view that the economy would shrink 4.5% this year.

“It appears that the health situation is becoming more severe,” Yaron told a news conference. “The rise in morbidity data in Israel increases the uncertainty and is expected to delay the return to routine economic activity.”

Still, with rates already near zero and the central bank’s long-time reluctance to move to negative rates, Yaron said policymakers turned to other monetary tools. It plans to buy 15 billion shekels ($4.4 billion) of high-rated corporate bonds in the secondary market, and it renewed three-year low interest loans to banks to allow credit to flow to companies.

The move sent stock and bond prices higher.

He noted that the bank continues to buy government bonds and intervene in the foreign exchange market.

Thirteen of 15 economists polled by Reuters believed the monetary policy committee would hold the line on rates after holding pat in May following a reduction from 0.25% on April 6. Two analysts expected a 10 basis point cut to 0%.

Central bank economists forecast a recovery next year with growth of 7.5%, above its estimate in late May for 6.8% growth in 2021, although the jobless rate looks to reach 9% this year.

“The economy is not expected to return to full activity until the end of 2021,” Yaron said, adding consumer demand is falling.

The bank’s staff reiterated an estimate that it expects the key rate to be in a 0-0.1% range in a year’s time.

After reopening the economy in May, Israel has seen a surge in coronavirus infections, prompting the government on Monday to re-impose some restrictions.

Reporting by Steven Scheer and Ari Rabinovitch; Editing by Tova Cohen and Hugh Lawson