The Bank of Israel kept interest rates unchanged at 4.50% for the fourth consecutive meeting on Monday, maintaining its cautious policy due to Israel’s nine-month-old war on the Gaza Strip.
The bank had cut interest rates by 25 basis points in January, after inflation fell and economic growth was hit by the Israeli war, but it kept policy unchanged after that, Reuters reported.
The central bank said that given the ongoing war, the focus remains on stabilizing markets and reducing uncertainty, in addition to stabilizing prices and supporting economic activity.
“The path of the interest rate will be determined by how close inflation is to its target, and the continued stability of financial markets, economic activity and fiscal policy,” he added.
Lower growth expectations
The Bank of Israel’s research department updated its forecasts, including GDP growth of 1.5% in 2024 and 4.2% in 2025, both down from previous forecasts issued in April.
Israel’s annual inflation rate remained at 2.8% in May, within the target range of 1% to 3%, after reaching 2.5% in February.
Meanwhile, Bloomberg reported that the Central Bank, under the leadership of its governor Amir Yaron, is facing economic instability due to the ongoing war on the Gaza Strip, the ongoing skirmishes with Hezbollah in the north, and the Federal Reserve’s halt to interest rate adjustments in the United States.
The war, now in its tenth month, threatens to escalate into a full-scale war with Hezbollah in Lebanon. Despite the resumption of cease-fire talks in Gaza, Prime Minister Benjamin Netanyahu’s administration is preparing for a potential full-scale conflict with Hezbollah, according to Bloomberg.
“If this assumption changes to a more severe scenario, it would likely eliminate the possibility of a rate cut,” Ronen Menachem, chief market economist at Mizrahi-Tefahot Bank, told Bloomberg.
The agency points out that the economic repercussions of the war are clear, as the yields on 10-year shekel government bonds reached their highest level in 13 years, at 5.2%, and the value of the shekel fell by about 4% against the dollar since last March.
Currency depreciation and increased financial burdens could exacerbate inflationary pressures.
Increase in government expenditure
Government spending has risen due to the war, with the budget deficit expected to reach 6.6% of GDP in 2024, one of the largest deficits this century.
Goldman Sachs economists, led by Kevin Daly, highlighted the central bank’s cautious approach, saying “uncertainty makes it difficult to have confidence in the likely timing of the next rate cut,” Bloomberg reported.
Bank Hapoalim expects inflation to reach 3.3% next year, while Leader Capital Markets expects it to reach 3.4%, depending on the performance of the shekel against the dollar.
The Federal Reserve’s decision to keep its key interest rate at its highest level in more than two decades since last July is likely to delay any possibility of monetary policy easing in Israel.
A wider spread in prices would hinder capital flows and weaken the local currency, Bloomberg says.
