Leaving the lending rate at just 0.1% raises some concern due to the country's worsening financial crisis sparked by the coronavirus pandemic. In fact, earlier predictions based on market data were split, with 50% expecting an interest rate cut compared to 50% expecting no changes.
However, the change to its QE program is seen more positively. The term quantitative easing refers to when a country's central bank buys bonds and securities to boost investment, lending and supply of capital in the market. Under this new expansion, the Bank of Israel's QE program will be given an additional NIS 35 billion to buy bonds, building on the NIS 50 billion addition announced in March, Globes reported.
The bank also announced a provision of four-year loans to banks at a negative 0.1% interest rate against bank loans given out to small businesses. However, this program, which amounts to a total of NIS 10 billion, will only apply to loans where the interest rate doesn't exceed 1.9% (specifically 1.3% plus the current prime rate, which at the time of writing is 0.6%), and will expire at the end of June 2021, according to Globes.
"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 the crisis is lengthening and that it is necessary in order to achieve the monetary policy goals and to moderate the negative economic impact created as a result of the crisis," the Monetary Committee said in a statement, according to Globes.
These announcement come in the wake of the economic forecast from the Bank of Israel's Research Department. According to these forecast, the national GDP could contract by 5% in 2020 but grow by 6.5% in 2021 with unemployment being 7.8% and debt to GDP ratio at 76%, or could contract by 6.5% in 2020 and grow only 1% in 2021, with unemployment at 13.9% and GDP to debt ratio at 83%. The two possible scenarios are dependent on how much control is attained over the pandemic, with the former being a positive outcome of greater control achieved and the latter being a negative outcome of less control.