Bank of Israel Keeps Interest Rates Steady Amid War

By Steven Scheer
JERUSALEM (Reuters) – The Bank of Israel (BoI) is set to maintain short-term interest rates unchanged for the sixth consecutive policy meeting on Wednesday. A Reuters poll revealed that markets believe rising inflation due to the ongoing Israel-Hamas conflict will prevent rate cuts until next year.

All 14 economists surveyed anticipate that the central bank will 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 rose to 3.6% in August from 3.2% in the previous month, marking the highest level in 10 months and exceeding the government’s target range of 1-3%. Inflation had previously dropped to as low as 2.5% in February.

In contrast, Israel’s economy only grew by an annualized 0.7% in the second quarter, reflecting a 0.9% contraction on a per capita basis.

Barclays economist Zalina Alborova warned that a prolonged war on multiple fronts could further weaken economic activity and exacerbate inflation, increasing the risk of stagflation.

Since October 7, 2023, Israel has been engaged in conflict with Hamas in Gaza, while also escalating attacks on Hezbollah in Lebanon due to a year of rocket fire. Concerns have risen about the potential for the conflict to extend to Iran.

Meitav Dash brokerage chief economist Alex Zabezhinsky noted that in typical circumstances, rising inflation, a weakening shekel, and a tight labor market would usually warrant a rate hike; however, the war has compelled the Bank of Israel to maintain its current rates.

Central bank officials project that rates will remain stable until at least 2025, while rates in the U.S. and Europe are likely to decline further. The bank had cut rates by 25 basis points in January but has since kept them steady.

Bank Hapoalim economist Victor Bahar stated that interest rate cuts are not currently on the agenda, and markets indicate a potential for a future rate hike. Nevertheless, given the low growth environment, Bahar expressed skepticism regarding a rate increase by the Bank of Israel.

He further mentioned that if the security situation leads to a rapid depreciation of the shekel, an intervention in the foreign exchange market may occur, similar to actions taken at the onset of the conflict.

The shekel has demonstrated volatility, appreciating by 0.5% against the dollar on Monday but declining by 2% so far in October and 5% this year.

Additionally, the central bank will update macroeconomic forecasts on Wednesday, coinciding with a news conference scheduled at 4:15 p.m. with Bank of Israel Governor Amir Yaron.