Prof. Yaron proposes government to speed up business aid and encourage budget growth • Leaving interest rate at 0.1% • Contrary to estimates: negative growth will be "only" 4.5%

• Prof. Amir Yaron

  Photo: 

  Joshua Joseph

After lowering the interest rate by 0.15% in April to 0.1%, the Governor of the Bank of Israel, Prof. Amir Yaron, left the interest rate unchanged this time.

In a previous interest rate decision last month, the Governor noted that the Bank of Israel would not hesitate to use all monetary tools, including the interest rate instruments, to minimize and reduce the damage to the economy and the economy following the Corona crisis. And yet Yaron favors monetary stability now, urging the government to formulate fiscal policy through the 2021-2020 budget that will support growth - that is, without raising taxes.

Alongside the interest rate decision, the Bank of Israel Research Division released a slightly more optimistic growth outlook for this year and next. In the April forecast, the Bank of Israel was pessimistic, forecasting that GDP would shrink by 5.3%, and now in the May revised forecast, the Bank of Israel sounds slightly less pessimistic and estimates that GDP would contract "only" by 4.5%.

With regard to unemployment, the deficit and the debt-to-GDP ratio - the Bank of Israel remains concerned: the unemployment forecast for this year at 8%, the Bank of Israel's facilities at 8.5% - with 353,000 unemployed. This is an average unemployment rate of 6.3% this year, rather than 6% in the April forecast. With regard to inflation, the Bank of Israel now expects negative inflation of minus 0.5%, compared with expected inflation of minus 0.8%.

As for 2021, the research division lowered its growth outlook, with GDP only growing at 6.8%, compared to 8.7% for April growth in the previous April forecast. The annual average unemployment rate for 2021 will continue to climb, reaching 6.7%, compared with estimates in the April forecast that unemployment moderation will fall to an average annual rate of 5.5%. According to the Bank of Israel, unemployment in the fourth and final quarter of 2021 will remain at 5.5% and will not fall to 4%.

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The Governor also notes in his decision that "We foresaw a change in the capital markets. The sharp declines in the stock markets were partially offset, and the government bond markets stabilized. The Bank of Israel's activity significantly reduced the return on government and corporate bonds in Israel. " In other words, the state pays lower interest on its debt, as do the companies.

According to the Governor, "The downward trend in the inflation environment continues, especially in light of the decline in energy prices. In light of the crisis, there is a methodological difficulty in calculating the CPI and analyzing the significance of the measured price changes." In other words, the last two published metrics are very difficult to rely on, as they certainly do not represent price changes in most of the products calculated, without making any transactions. This is probably also one of the considerations not to change interest rates in an environment of uncertainty.