Bank of Israel has left the basic interest rate unchanged - 0.1%

The Bank of Israel has left the basic interest rate in the economy at its current rate - 0.1% per year. The prime interest rate will therefore remain 1.6% per year. The interest rate decision today was the last before the holidays, but if necessary, the Bank of Israel can always make a sudden change in the interest rate, if it deems it necessary in light of the situation in the economy and interest rates in the world.
The Bank of Israel has also published its updated forecasts for the Israeli economy. In the optimistic scenario, the Central Bank assumes that Israel will return from September to the route of expanding the scope of economic activity, so that at the end of the year the level of inactivity of the economy will decrease and stabilize at minus 7% -8% - a level that will last until a vaccine is found.
The Bank of Israel fears, in the pessimistic scenario, that Israel may experience waves of illness that will lead to waves of reduced activity every few months, until a vaccine is found. As a working assumption only, in both scenarios, finding a vaccine begins to affect the economy only in the second half of 2021, then a recovery in the economy begins and the economy begins to gradually converge towards the level of potential activity.
In the optimistic scenario, GDP in 2020 is expected to shrink by only 4.5%. The control of the epidemic allows for a relatively high level of economic activity, so that in 2021 growth is expected to be relatively high - about 6.0%, but still the average level of economic activity will be about 5% lower compared to the pre-crisis trend.
The inflation rate in the next four quarters is expected to be 0% and in 2021 0.4%. The broad unemployment rate among those aged 15 and over is expected to be 11.6% at the end of 2020 and fall to 7.7% at the end of 2021, compared with 10.5% and 6.6% respectively in the July forecast.
In the pessimistic scenario, GDP in 2020 is expected to shrink by 7%, and next year growth will amount to only 3%, so that the average level of activity will be about 10% lower than the pre-crisis trend. The inflation rate in the next four quarters is expected to be 0.6%, and 0.9% in 2021. The broad unemployment rate is expected to rise to 13.6% at the end of 2020 and to fall to 12.1% at the end of 2021.
In both scenarios, the Research Division estimates that the interest rate is expected to be in the range of 0% -0.1% in a year, similar to the forecast from the beginning of July, but the Bank of Israel may expand or accelerate the use of existing or additional policy tools, including interest rate tools.
Private consumption is expected to decline by 7.5% in 2020, despite its expected recovery starting in the third quarter. This is against the background of expected damage to employment and income, an increase in uncertainty and the limitations of the purple character, which will moderate demand. In 2021, private consumption is expected to recover and grow by 9%, but its level will still be low in relation to the level derived from the trend before the crisis.
Investments are expected to fall by 7.5% in 2020 against the background of the increase in uncertainty and the expectation of a decline in activity, and to rise by 4.5% in 2021. Exports are expected to decline by 4.0% in 2020, when its contraction was updated downwards against the background of relatively good data in the first and second quarters, relative to the estimated large decline in world trade. In 2021, we estimate that exports will grow by 4.0%.
In contrast, public consumption is expected to rise by 7.0% in 2020 - mainly due to the contribution of the fiscal aid packages approved by the government to support economic activity and employment. The government deficit is expected to stand at about 13.2 percent of GDP in 2020 and the debt-to-GDP ratio is expected to rise to 75% (similar to the July forecast). In 2021, the deficit is expected to be 8.2 percent of GDP and the debt-to-GDP ratio to 78%.
On the sources side, imports are also expected to shrink in 2020, by 7.5%, and grow by 7.0% in 2021, against the background of the development of private consumption and investment in these years.