Bank of Israel - Press Releases -  Lecture by Andrew Abir, Deputy Governor and Member of the Bank of Israel Monetary Committee, on monetary policy during the corona crisis
Central bank: boi | Type: statement | Date: 2020-06-18

Bank of Israel Deputy Governor
Andrew Abir, a member of the Bank of Israel Monetary Committee, delivered a
lecture today at the Meitav Dash investment house conference, and discussed the
monetary policy conducted by the Bank of Israel during the corona crisis.
.  In addition, Abir surveyed the state of the
real economy.  He emphasized that the
corona crisis began with the Israeli economy in relatively good shape, in view
of the low debt-to-GDP ratio that had been constantly declining in recent
years, a current account surplus, GDP growth at the potential rate, and a tight
labor market (Slide 4).  Abir noted that
GDP growth in Israel in recent years was strong compared with the other
advanced economies, but that in terms of per capita GDP growth, the increase could
not keep up with the other advanced economies. 
One of the reasons for this is the low productivity of the Israeli
worker, and the need to increase that productivity is the main economic
challenge in Israel in the coming decade.
Due to the effect of the corona
crisis in Israel and around the world, 2020 will feature a recession in the
global economy, but a rapid recovery is expected in 2021 both in Israel and in
the rest of the world (Slides 5 and 6). 
However, in a scenario where there is a significant second wave or if
the pandemic worsens, the negative economic impact in Israel and abroad will be
significantly stronger.
In relation to the effect of the
corona crisis on economic activity, Abir reviewed the shut-down rate in each of
the principle industries according to Bank of Israel assessments, the strong
impact of the crisis on the labor market, the significant impact on the weaker
sections of the population, the increase in the unemployment rate, and the
massive amount of workers being put on unpaid leave.  Abir discussed the effect of the government
programs and the gradual return to work of employees (Slides 7 and 8).
Abir noted that the special
nature of the crisis and the need to set economic policy in a constantly fluid situation
emphasized the Bank’s need for rapid information that could illustrate the
needs of the public and of the economy in real time, and enable policy-making
accordingly.  In view of this, the Bank
developed a series of “rapid indicators”, including: credit card expenses in
various industries based on data from Shva—which makes it possible to identify
the negative impact in each industry; reports on public movement trends, based
on data from Google and Apple; and data on electricity consumption, from the
Israel Electric Company (Slides 11 and 12).
He also discussed the steadfast,
active, ad rapid monetary policy management by the Bank of Israel during the
corona crisis, in view of the sharp declines in the markets, the increasing
costs of credit in the economy, and the liquidity distress in the markets.  The purpose of such policy management was to
minimize the extent of damage to the economy and to put it back on track.  Abir noted that the Bank of Israel’s activity
beyond monetary policy focused on two other central issues: credit and
payments, and economic advice to the government (Slide 17).  As part of the assistance to the economy in
dealing with the crisis, Abir noted that the development of significant exposure
on the part of institutional investors to foreign derivatives, alongside
demands for collateral on the part of foreign parties with whom the
institutional investors carried out transactions against existing positions led
to a shortage of dollars in the economy. 
This required immediate involvement by the bank of Israel to help
prevent a further deterioration in the dollar/shekel swap market.  The situation in Israel relating to this
market was more unusual than in most of the world.  Abir noted that the liquidity that was
supplied to the foreign exchange market is temporary, and that the Bank of
Israel expects market participants to arrange things so that they are not
exposed in the same manner to dollar financing needs.
The Bank of Israel also
identified a liquidity problem in government bonds, which had an effect on the
higher cost of credit in the economy. 
Here too, the Bank of Israel chose to act aggressively and committed to
purchase about NIS 50 billion in government bonds—three times as much as the
Bank’s intervention in the 2008–9 crisis. 
Abir noted that the Bank’s high foreign exchange reserves are what
enable these aggressive actions, and that they are a strategic asset for the
Israeli economy.  In addition, if the
crisis worsens, the Bank has the ability to increase the existing programs or
to implement new ones such as the purchase of corporate bonds should it be
necessary (Slides 19–24).
In his conclusion, Abir discussed
the challenges to the economy looking forward. 
A significant challenge is the deficit in the state budget in the coming
years, and the need to return to a path that will enable a reduction in the
debt-to-GDP ratio, which has increased due to the crisis, once it is shown that
the state of the economy has returned to strength (Slides 26 and 27).  In this context, Abir noted that the
government now has very easy financial terms for financing its debt (Slide 28).​