Israel central bank's Abir says buying corporate bonds to prevent layoffs

JERUSALEM (Reuters) - The Bank of Israel’s decision to start buying corporate bonds should enable companies to issue debt and prevent further layoffs as a result of the coronavirus pandemic, deputy governor Andrew Abir said.

FILE PHOTO: Bank of Israel Deputy Governor Andrew Abir poses for a picture in his office in Jerusalem July 8, 2020. REUTERS/Ammar Awad

On Monday, the bank held its benchmark interest rate ILINR=ECI at 0.1% but said it would buy 15 billion shekels ($4 billion) of higher-rated corporate bonds in the secondary market.

“It’s not that the corporate bond market was not functioning or because spreads have widened dramatically, but rather the understanding that over the next 6-12 months, there’s going to be a need for issuance in that market,” Abir told Reuters.

The central bank began purchases on March 15 of up to 50 billion shekels of government bonds, which has helped reverse a spike in government and corporate yields.

The index of bonds issued by Israel's 20 largest firms .TELBOND20 has gained 1.4% following the central bank's announcement, following three weeks of declines.

Noting that more than 40% of corporate credit comes from the bond market, Abir said that fear of being frozen out the market could lead to cash hoarding and cost-cutting, including jobs.

“We want to prevent a situation where a company is having question marks in its ability to fund themselves (and) lays off another 1,000 workers.”

Unemployment is already more than 20% and could worsen after some COVID-19 restrictions were reimposed.

Abir said risks to the central bank’s scenario of a record 6% economic contraction in 2020 will be “to the downside” if the infection rate stays high.

Analysts are split over whether the central bank will lower its key rate to 0% or negative. The Bank of Israel has indicated it is reluctant to do so.

“We still have more measures that we can do. QE can be increased. We haven’t run out of our policy options,” Abir said.

Reporting by Steven Scheer; Editing by Catherine Evans