* Israeli inflation turned positive in March
* No sign of inflation spike-cenbank gov Yaron
* Economy recovering quickly, Yaron says
* Governor calls for quicker reforms
JERUSALEM, May 10 (Reuters) - Israel's economy is recovering
quickly from the COVID crisis but interest rate increases are
some way off given inflation is expected to stay well contained,
Bank of Israel Governor Amir Yaron said.
Yaron said policymakers have once again begun to focus on
inflation after the consumer price index turned positive in
March for the first time in a year at an annual rate of 0.2%.
The rate is projected to enter the official 1-3% annual target
range soon and stabilize around 1.6% for the next few years,
based on bond yields.
A key question, the governor said, is how much of the gain
stems from bottlenecks in the economy and adjustments in supply
"We're not seeing a risk of any eruption in inflation that
is detrimental to the economy and therefore that allows us to
continue to be accommodative and I think it's going to be very
market based in terms of where and how fast we see these
processes come through the economy," Yaron told Reuters.
"At some point, depending on economic activity and depending
on inflation, depending on financial stability, etc, those will
be the considerations that will enact a change in the primary
focus point for a change in the (interest rates) stance."
Israel's benchmark interest rate has stood at a
record low of 0.1% for more than a year after a single 15 basis
point cut in April 2020 at outset of the pandemic. Despite a
spike in unemployment caused by three lockdowns aimed at
limiting the coronavirus' spread, the central bank opted to hold
the line on rates, preferring other measures to keep credit
flowing such as buying bonds and cut-rate loans to banks.
The Israeli economy contracted a less than expected 2.6% in
2020 and Yaron said growth remained on track to hit the bank's
6.3% estimate in 2021 "as long as there is no new mutation that
is detrimental". Israel's economy is almost fully open with more
than half of the population fully vaccinated.
"Israel's economy is bouncing back very fast," he said. But
while the jobless rate has gradually dipped back to 8% from more
than 25% last year, pre-virus levels of around 4% may be tough
to attain since some jobs have been eliminated given companies
have become more efficient as a result of the pandemic.
Yaron has called for more training while the economy
transforms but Israel's political situation is also in flux
following four inconclusive elections in two years and a fifth
election later this year is possible.
As a result of the political squabbling, Israel is still
using a pro-rated version of the 2019 state budget that was
approved in mid-2018. Yaron said that in the short term, the
lack of a budget is not a big issue but Israel requires reforms
in education, infrastructure and regulation that is harming the
He said Israel needs investments of 2% of economic output
for several years, particularly in education where Israel scores
poorly among OECD peers, that will boost Israel's economy over
then next decade.
"Time is money...we are losing time in putting these reforms
in place and the gaps are only being extended," Yaron said.
Yet, foreign investment in Israel remains strong and has
helped to underpin the shekel. The Bank of Israel in
January had said it would buy $30 billion of foreign currency in
2021 after buying $21 billion last year but the shekel is only
down 1.2% versus the dollar so far this year.
Over the first four months of 2021, the bank has bought
nearly $20 billion of forex. "We wont be shy extending it if
needed and depending on economic conditions and activity," Yaron
said, dismissing Israel's forex reserves nearing $200 billion as
a big issue.
Similarly, Yaron said the bank is in no rush to decide
whether to end its government bond buying programme, in which it
has bought 62.3 billion shekels out of a planned 85 billion. He
noted that a tapering in recent months has been a "function of
markets" and that guidance on its quantitative easing (QE)
programme would come in mid to late summer.
"We will know more where the economy is somewhere around
summer," Yaron said, adding at its current pace the QE could
last another eight months. "We also need to see what is
happening to (the economy and bond yields) in the rest of the
(Reporting by Steven Scheer; Editing by Toby Chopra)