For the first time since 2009, Israel's central bank will start buying government bonds to reduce uncertainty and improve liquidity, the latest critical measure in the midst of the coronavirus pandemic.
The bank will purchase government equities and offer financial institutions in Israel repo deals, using government bonds as a form of collateral. The federal lender did not outline the size of the planned purchases, only that it would acquire them "in necessary amounts."
Most Middle East stock markets dropped on Sunday, following attempts by regional financial institutions to shield economies from virus-related shocks and declining oil prices.
Despite interest rates only above all-time lows, the Bank of Israel is releasing liquidity after a partial closure has been declared by the government that covers all non-essential companies. Israel has 200 coronavirus positive cases, and no deaths.
Under then-Governor Stanley Fischer, in the wake of the global financial crisis more than 10 years ago the central bank purchased government bonds with the goal of driving down yields to make it easier for businesses to collect funds.
The steps are intended to improve liquidity and decrease market volatility as spending is curtailed by closed businesses, reduced travel, customer concerns, and plummeting equities. It will be the first time that the bank has operated on the bond market since the global recession of 2009.
In the coming days, banks are expected to implement additional steps, including loan easing, credit, remote transactions, and ATM cash supply policies.
Stocks increased in Sunday morning trade, with the Tel Aviv-35 Index rising 1 percent. Prices grew on Israeli benchmark government bonds that matured in 2030.
The decision follows emergency measures at major central banks around the world to loosen monetary policy as the epidemic clobbers markets and the global economy.
Additionally, after a proposal from the Bank of Israel, Israeli lenders must change policy to benefit the business sector and the general public. The newly announced regulatory leniencies of the banks are targeted in particular at small and medium-sized businesses, which rely heavily on bank loans.
The outbreak could shrink Israel's annual economic growth by one to two points, estimated by the Ministry of Finance, from a pre-crisis projection of three percent growth.
The chief economist of the ministry, Shira Greenberg, estimated the closure would cost NIS 4.5 billion ($1.2 billion) if it were only to last three weeks. The lower number is based on the premise that at the start of the recession, employers would initiate measures that would retain employees instead of letting go of a big number of them.
