By Steven Scheer

JERUSALEM (Reuters) – The Bank of Israel (BoI) will keep short-term interest rates unchanged for a fifth straight meeting on Wednesday. Economists remain uncertain about the timing of potential rate cuts due to rising price pressures and the ongoing Israel-Hamas war, according to a Reuters poll.

All 15 economists surveyed expect the central bank to maintain its benchmark rate at 4.5%, with the decision to be announced on Wednesday at 4 p.m. (1300 GMT).

Israel’s annual inflation rate accelerated to 3.2% in July from 2.9% the previous month, moving above the bank’s 1-3% target range after dipping to 2.5% in February.

In contrast, Israel’s economy grew by an annualized rate of just 1.2% in the second quarter, based on preliminary estimates.

JP Morgan economist Anatoliy Shal noted, “The BoI will prioritize higher inflation news over soft growth news.” He added that the central bank would remain cautious, particularly given the tense geopolitical climate.

Most economists expect the rates to hold steady for the next few months due to factors such as increased inflation, a looser fiscal policy, and heightened risk premiums from the prolonged war in Gaza.

Goldman Sachs economist Kevin Daly remarked on the uncertainty surrounding the timing of the next rate cut.

The country’s budget deficit has surged to 8.1% of GDP amid rising defense costs, surpassing the 2024 target of 6.6%.

In contrast, both the U.S. Federal Reserve and the European Central Bank are poised to cut rates next month.

Leader Capital Markets Chief Economist Jonathan Katz stated, “Unlike the Fed and ECB, the Bank of Israel will continue to emphasize inflationary risks, including fiscal policy and housing price pressures.”

Despite these challenges, the shekel has reached a month-high of approximately 3.65 per dollar, gaining 3% in August. This is fueled by optimism that the current conflict remains contained and expectations of near-term U.S. rate cuts.

The BoI had previously lowered its key rate by 25 basis points in January, following an aggressive tightening cycle of 10 consecutive rate hikes from an all-time low of 0.1% in April 2022, finishing with a pause in July.

Daly expressed a relatively dovish outlook on Israeli inflation and rates, predicting a decline in inflation over the coming months and suggesting that reduced shekel volatility may allow the BoI to resume its rate-cutting cycle later this year.