The Bank of Israel on Monday announced it would acquire $13.4 billion in open-market government bonds to ease credit conditions as the coronavirus crisis bludgeons the national economy and global markets.
After re-starting the program last week for the first time since 2009, the Bank of Israel defined the size of quantitative easing with a view to stabilizing the economy and lowering yields across the curve. After the announcement the shekel sustained losses against the dollar, while prices on 10-year government equities increased.
The Bank of Israel said that in the past few weeks, the economic situation of the country has dramatically deteriorated as a result of the global health crisis. Officials said the country's economic activity has been seriously disrupted and financial market uncertainty has risen. In this connection, the Monetary Committee has agreed to initiate a government bond buying program.
The bank initially gave a fairly positive view of the crisis, forecasting a loss of less than 1 percent to the gross domestic product of Israel, but the government outlook, including that of the Ministry of Finance, has become more and more grim.
Israel has entered a partial economic shutdown, with infections rising past 1,200 cases. The government has proposed a 29 billion shekels assistance program, much of it in low-cost state-backed loans and tax-payment deferrals.
The Bank of Israel notes that its interest rate has long been weak, easing business sector and household funding needs. Massive bond purchases would allow the bank to influence bond yields, lower long-term corporate and household credit costs, reduce volatility of bonds, and stabilize markets, the bank said.
With its main interest rate already close to zero level, the nation's key lender concentrates on improving market liquidity. In addition to buying government debt, it also uses its large foreign-currency reserve to sell swaps worth up to $15 billion to relieve pressure on local borrowers for dollar liquidity.
The US Federal Reserve declared earlier today a major expansion of its loan programs to remove the bottlenecks in the credit markets that emerged last week. It has also expanded its lines of credit to include corporate bonds and some municipal bonds.
Additionally, the Federal Reserve announced that it would soon unveil a "Main Street Loan System" which would fund loans to qualifying small and medium-sized businesses.
The Bank of Israel sprang into action in the equity market on March 15 for the first time since the 2009 financial turmoil.
