Israel’s central bank has decided to maintain its current interest rates, refraining from a second consecutive rate cut due to concerns over potential inflationary pressures amid the ongoing conflict with Hamas. The decision to keep the key rate at 4.5% came as a surprise to most economists surveyed by Bloomberg, who had anticipated a quarter-percentage-point reduction. Following the announcement, the shekel stabilized and closed relatively unchanged against the dollar.
Speaking after the decision in Jerusalem, Governor Amir Yaron emphasized that while the central bank maintains an easing bias, it remains cautious about the potential impacts of the conflict on inflation dynamics. Yaron stated, “There is still uncertainty related to the impacts of the war on inflation processes,” underscoring the importance of responsible fiscal policy and its communication to the markets, which are closely monitoring developments in Israel amidst the ongoing conflict.
The decision to hold rates reflects the complex considerations facing policymakers as the conflict with Hamas enters its sixth month. Despite concerns over the economy following a near-record contraction in the last quarter, the central bank has cautioned that significant government spending in response to the conflict could impede further monetary easing. Additionally, factors such as shekel volatility, geopolitical tensions, and credit rating downgrades contribute to the cautious approach.
Despite recent signs of slowing price growth, there remains room for the Bank of Israel to provide additional stimulus. The central bank’s research department projects the interest rate to be in the range of 3.75% to 4% in the fourth quarter of 2024, indicating the potential for multiple rate cuts this year.
In its statement accompanying the decision, the central bank reiterated its focus on stabilizing markets, reducing uncertainty, maintaining price stability, and supporting economic activity. However, it also acknowledged the presence of several risks that could potentially accelerate inflation.
Israel’s decision to refrain from a rate cut aligns with the cautious stance of global central banks. The US Federal Reserve has signaled a reluctance to reduce rates, while policymakers at the European Central Bank are awaiting further data before considering monetary easing.
Despite a recent downgrade by Moody’s Investors Service, Israel’s markets have remained relatively calm. The shekel has strengthened against major currencies, aided by gains in global tech stocks. Moreover, Israel’s borrowing costs, adjusted for inflation, remain comparable to those of other developed economies.
While annual inflation in Israel has slowed in recent months, increased government spending and ongoing supply chain disruptions pose risks of persistent inflationary pressures. The uncertain trajectory of the conflict, particularly the potential for escalation along Israel’s northern border, adds further uncertainty to the economic outlook.
Despite economic challenges, early indicators suggest a potential rebound in 2024, with improvements in private consumption and the labor market. Rate cuts are expected to resume in April, with forecasts indicating moderate growth in 2024 followed by a considerable acceleration in the following year.
In summary, Israel’s decision to maintain interest rates reflects a cautious approach amid ongoing conflict and inflationary concerns. While the economic outlook remains uncertain, policymakers are focused on balancing the need for stimulus with the risks posed by the current geopolitical environment and government spending initiatives.
