Bank of Israel Monitors Inflation Amid Fiscal Policy

By Steven Scheer

JERUSALEM (Reuters) – Bank of Israel policymakers are closely observing inflation data and the 2025 budget’s commitment to a very expansionary fiscal policy, which will influence decisions on rate hikes to manage escalating price pressures, said Deputy Governor Andrew Abir on Thursday.

With inflation climbing sharply in recent months, the central bank kept its benchmark interest rate at 4.5% for the sixth consecutive meeting after a 25 basis point reduction on January 1. This contrasts with declining inflation and interest rates in the United States and Europe.

Israeli inflation jumped to 3.6% in August, up from 3.2% in July, largely due to supply disruptions linked to Israel's conflict with Hamas in Gaza, moving beyond the government’s target range of 1%-3%.

> "We’ll have two CPI readings to analyze before the next interest rate meeting," Abir noted.

The next decision on interest rates is scheduled for November 25. Abir highlighted that the cabinet will vote on the 2025 state budget draft on October 31.

> "There are plenty of important data points to come, along with developments in the war," Abir added. "Monetary policy is restrictive, but we need to assess if it’s sufficient to bring inflation back within target and maintain market stability."

Abir acknowledged that the circumstances have shifted since the last discussion post the previous rates decision in late August, complicating the inflationary landscape.

Caution in Policy Decisions

Despite supply disruptions impacting tourism, construction, and agriculture, Abir mentioned that demand remains strong, with consumer spending increasing since the war began on October 7, 2023.

> "It’s a complex scenario where supply is constrained while demand is robust. We’re cautious not to let demand collapse, balancing supply and demand remains crucial," he stated.

Abir pointed out the significant influence of fiscal policy, which he described as very expansionary due to increased state spending for the war, suggesting it could be inflationary and may affect monetary policy.

With a projected growth of just 0.5% for 2024, Abir does not foresee stagflation, attributing this to low unemployment and rising wages boosting demand.

> "We don’t want to overreact but need to see inflation returning to target," Abir remarked, suggesting this might not occur until late 2025. "The necessity for further monetary constraints remains to be seen. No central bank desires to raise interest rates, but our duty is to control inflation for sustainable growth long-term."