US, WASHINGTON (ORDO NEWS) — The Bank of Israel left its base interest rate at 0.1%, saying that the economic damage from an outbreak of coronavirus is likely to be less than originally expected, reports Reuters.
“The gradual process of removing restrictions that the government imposed on movement and activities is beginning to affect economic activity, although the negative impact on the economy is still significant and is expected to continue,” the central bank said.
After several weeks of blocking, during which unemployment claims rose, Israel loosened restrictions. Schools and shopping centers have reopened, and restaurants will open this week.
In an updated forecast, the Bank of Israel predicted that the Israeli economy will contract 4.5% this year. In April, the central bank assumed that the Israeli economy would decline by 5.3%, while the Central Bank lowered the interest rate from 0.25% for the first time in five years.
In 2021, the central bank predicts economic growth of 6.8% compared with the previous estimate of 8.7%, provided there are no additional waves of infection.
Analysts doubt that the central bank will lower the interest rate to zero or a negative level, although deflation is projected at 0.5% in 2020. The bank’s own economists believe that in a year the key rate will be in the range from 0% to 0.1%.
Israel’s economy contracted 7.1% year-on-year in Q1 due to lower consumer and government spending, exports, and investment, while annual inflation fell to -0.6% in April. More than 1 million people have applied for unemployment benefits, although about 200 thousand people have already returned to work.
“The unemployment rate at the end of 2021 will be higher than it was before the crisis,” the bank said.
The regulator confirmed that it used a number of instruments, such as foreign exchange interventions and the purchase of bonds, to increase monetary expansion, the regulator will expand the use of existing instruments, including the interest rate instrument, and will use additional measures to mitigate the negative economic impact.
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