The Bank of Israel kept interest rates unchanged last week for the fifth consecutive time, citing geopolitical uncertainty that has increased economic risks, along with rising inflation, and said rates are unlikely to fall further until 2025.
The central bank, concerned about Israel’s risk premium, which has increased since Israel’s war against Hamas militants began on October 7, left its benchmark rate at 4.50 percent. This was expected.
“In view of the ongoing war, the monetary committee’s policy is focusing on stabilizing markets and reducing uncertainty, along with price stability and supporting economic activity,” the Bank of Israel said in a statement.
Policymakers have expressed concerns about fiscal easing as the war and geopolitical risks are reflected in high-yield spreads between Israeli and U.S. government bonds and credit default swap spreads that are near record highs.
The central bank cut its rate by 25 basis points in January after inflation eased and economic growth slowed during the Gaza war, but held policy steady in February, April, May and July.
Rates were expected to fall further this year, with two more decisions on Oct. 9 and Nov. 25, but Deputy Governor Andrew Abir said that was unlikely.
“We are unlikely to cut rates before 2025,” Abir said, noting that the decision remains data-dependent; ”As long as uncertainty over the war (and) dislocation in various key sectors continues, it is difficult for us to be able to reduce interest rates (…) “Because of the fiscal situation, this leads us to be more cautious and conservative on monetary policy (…) And we think a higher level of interest is needed to keep the economy and markets stable,” Abir said.
He said there were too many factors working against a rate cut, such as rising inflation and the Gaza war, which has created supply disruptions and labor shortages. Such conditions have led to a higher budget deficit, and the government has yet to present a credible state budget for 2025.
Israel’s annual inflation rate rose to 3.2 percent in July from 2.9 percent the previous month, returning above the government’s target range of 1 percent to 3 percent after falling as low as 2.5 percent in February.
The economy grew by an annualized 1.2 percent in the second quarter, slowing significantly from a 17.3 percent pace in the first quarter.
“The level of economic activity is below the trend line and even below its level in the corresponding quarter of 2023, and is strongly affected by supply constraints,” the bank said.
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Antonio Albanese e Graziella Giangiulio
