JERUSALEM (Reuters)

The Bank of Israel is unlikely to lower short-term interest rates at its remaining two 2024 policy meetings due to rising price pressures and ongoing geopolitical risks, stated Deputy Governor Andrew Abir on Wednesday.

Earlier, the central bank maintained its benchmark interest rate at 4.5% for the fifth consecutive time, citing inflation worries, which have risen to 3.2% amid the ongoing Gaza war and fears of a broader regional conflict.

While the bank had eased rates by 25 basis points in January, it has kept them steady since. “It’s unlikely for us to be cutting rates until well into 2025,” Abir told Reuters, emphasizing that future decisions remain data-dependent.

Abir noted that ongoing uncertainty around the war and disruptions in key industries hinder potential rate cuts. The policymakers’ next meetings for rate discussions are on Oct. 9, Nov. 25, and Jan. 6, 2025.

Israel’s inflation rate is anticipated to rise above 3.5% in the upcoming months, partially influenced by a planned increase in the value-added tax set for early 2025. However, it is expected to taper back into the 1%-3% target range in the latter half of the year.

“You have to see progress being made on inflation coming back down into the target range,” Abir remarked. He acknowledged that inflation is primarily arising from supply-side issues, including a labor shortage due to restrictions on Palestinian workers, military call-ups, and displacement of people in northern Israel due to conflict.

Abir expressed concerns that the war’s prolonged nature has created real economic shocks, leading to a sharp decline in investments, particularly in the construction sector. He cautioned that reducing rates now could exacerbate imbalances between demand and supply, causing price increases, especially in housing, despite an annualized economic growth of just 1.2% in the second quarter.

Furthermore, during times of uncertainty and geopolitical risk, investors seek higher returns, and lowering interest rates could undermine this demand, leading to potential currency depreciation.

The shekel has experienced volatility but has recently appreciated by 3% against the dollar this month, fueled by speculation of a possible all-out war with Hezbollah or Iran, while the U.S. Federal Reserve is expected to lower rates in September.

Fiscal policy remains a critical factor, with war-related increases in the budget deficit frustrating the central bank’s efforts. Abir criticized the government’s slow progress on establishing a credible 2025 state budget, indicating it would necessitate spending cuts in non-growth areas and tax hikes.

“Because of the fiscal situation, that leads us to being more cautious and conservative about monetary policy,” Abir concluded. “And we think a higher interest level is needed to maintain stability in the economy and markets.”