Bank of Israel likely to hold rates steady

Amidst rising inflation fueled by record government spending and ongoing conflict, the Bank of Israel is likely to keep interest rates steady for the remainder of the year, Bloomberg reported.

Initially considering up to three rate cuts to bolster the economy amidst war-induced volatility, the Bank of Israel now faces mounting pressure to curb inflation approaching the upper end of its 1-3 per cent target range.

The prolonged war on Gaza, now in its seventh month, has prompted policymakers to adopt a more neutral stance. Economists predict the benchmark rate will remain at 4.5 per cent, with Citigroup and Bank Hapoalim withdrawing expectations for further cuts.

Concerns over widening interest rate differentials with the US, potential shekel depreciation, and increased inflationary pressure weigh on the bank’s decision-making.

The ballooning war bill, reaching $16 billion, exacerbates budget deficits, prompting calls for responsible fiscal management. Economic growth prospects dim amid ongoing war disruptions, with GDP still below pre-war levels.

While the central bank expects modest expansion, S&P Global Ratings and Moody’s foresee a weaker outlook. Inflation, surging to 2.8 per cent in April, further complicates monetary policy, with food and air travel costs contributing to sustained price growth.

Analysts at Bank Hapoalim predict inflation to reach 3.2 per cent, skewing risks towards higher inflation. Despite earlier forecasts for rate cuts, Goldman Sachs now anticipates a hold on policy easing, citing inflationary pressures and geopolitical uncertainty. However, they maintain a dovish outlook, projecting a cutting cycle in the third quarter as shekel strength aids disinflationary trends.