Bank of Israel to maintain rates

Bank of Israel is expected to maintain interest rates at 4.5 per cent for the fourth time amid their ongoing aggression on Gaza. Economists surveyed by Bloomberg predict no rate changes, with Governor Amir Yaron set to speak after the rate meeting.

New economic forecasts will be released, potentially revising an April outlook that projected a key rate of 3.75 per cent in early 2025. Barclays economists suggest no further rate cuts this year, even if geopolitical conditions improve, due to inflation pressures.

The 10-month war on Gaza impact the central bank’s cautious stance. The economic fallout from the war, including market turmoil and a 13-year high yield on 10-year shekel bonds, influences this decision.

Further hostilities with Lebanon could depreciate the shekel, disrupt supply chains, and increase fiscal burdens, heightening inflation. Government spending has surged, leading to a projected budget deficit of 6.6 per cent of GDP in 2024.

Annual price growth is at 2.8 per cent, within the target range but expected to exceed 3 per cent. A delay in US interest rate cuts will likely postpone monetary easing in Israel. Federal Reserve officials have scaled back expectations for rate cuts, maintaining the highest policy rate in over two decades.

Analysts at Bank Hapoalim foresee no rate reduction under current conditions. They suggest an interest rate cut could be considered by year’s end if hostilities cease and the US Fed begins loosening monetary policy.

Attribution: Bloomberg