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Bank of Israel keeps interest rate unchanged, warns against tax hikes

The Bank of Israel’s director held interest rates steady and is reportedly looking to government fiscal policy to spark growth.

By David Isaac, World Israel News

Bank of Israel Director Amir Yaron announced he would keep the interest rate unchanged at 0.1 percent on Monday.

In April, he had reduced the interest rate by 0.15 percent. It was the first rate cut in five years, an action meant to help small- and medium-sized businesses struggling during the pandemic.

Yaron opposes raising taxes, which would further burden struggling businesses. However, Israel’s new Minister of the Economy Amir Peretz has suggested policies that would necessitate doing just that.

When Yaron made his decision to cut rates last month, he said Israel wouldn’t hesitate to use all monetary means at its disposal, including the interest rate, to help the country exit the financial crisis.

However, now he would like to see economic improvement come through government fiscal policy by way of a growth-friendly 2020-2021 budget.

Another reason for holding interest rates steady is the slightly more optimistic forecast of the Bank of Israel compared to April. “The Department currently expects a contraction in 2020 GDP of 4.5 percent (compared with a contraction of 5.3 percent in the April forecast),” the Bank of Israel said in a statement on Monday.

The Bank’s unemployment prediction, however, became more pessimistic with the unemployment rate in the second half of 2020 expected to rise to 8.5 percent v. 8 percent in the previous forecast.

The newest forecast also shows the 2020 government budget deficit ballooning to 11.5 percent of GDP, up from the 11 percent estimate last month.

The Bank notes that although economies around the world are slowly returning to work, “the magnitude of the global economic crisis is still high.”

The Bank issued numbers in the event of a second wave of the pandemic. If the coronavirus strikes again, it expects 2020 GDP “to contract even more sharply, by approximately 8 percent.” The unemployment rate would spike “to 11 percent in the fourth quarter.”