Interest Rates Steady Amid Rising Inflation Concerns in Israel

Bank of Israel Keeps Interest Rates Steady Amid Inflation

By Steven Scheer

The Bank of Israel (BoI) has decided to maintain its short-term interest rates at 4.5% for the sixth consecutive policy meeting. This decision comes as rising inflation, significantly influenced by the ongoing Israel-Hamas conflict, is expected to hold rates steady until next year, according to a recent poll by Reuters involving 14 economists.

Economists' Consensus on Benchmark Rates

All economists surveyed predict that the central bank will announce no changes to the benchmark rate during their upcoming meeting. The anticipation is that current conditions necessitate a cautious stance regarding interest rates amidst fluctuating economic indicators.

Inflation Trends and Economic Growth

Israel's annual inflation rate climbed to 3.6% in August, marking a 10-month high, up from 3.2% the previous month. This rate is notably above the government’s target range of 1-3%. In February, the inflation rate dipped to 2.5%, highlighting the volatility in the economic landscape. In stark contrast, during the second quarter, Israel's economic growth stagnated at an annualized rate of just 0.7%, with a per capita contraction of 0.9%.

Impact of Ongoing Conflicts on Economic Outlook

According to Barclays economist Zalina Alborova, an extended conflict on multiple fronts could further destabilize economic performance while simultaneously fueling inflation, which raises the specter of stagflation. The ongoing hostilities since October 7, 2023, especially the conflict with Hamas in Gaza, have compounded economic uncertainties.

Geopolitical Tensions and their Economic Ramifications

In response to rising tensions, Israel has increased military actions against Hezbollah in Lebanon. This multifaceted conflict raises concerns of a broader regional war with potential implications for global oil markets and investor confidence.

Market Reactions to Inflationary Pressures

Meitav brokerage’s chief economist, Alex Zabezhinsky, commented on the unusual circumstances where traditionally, a rise in inflation along with a weaker shekel would trigger a rate hike. However, the prevailing geopolitical situation has pressured the Bank of Israel to maintain the current rates. The central bank has expressed intentions to keep rates unchanged until at least 2025.

Predictions for Future Economic Policies

Despite U.S. and European rates trending lower, Israeli economists remain skeptical about future rate hikes in a low-growth environment. Bank Hapoalim economist Victor Bahar suggested that if the security situation leads to a further depreciation of the shekel, the Bank of Israel might intervene in the foreign exchange market as it did during the earlier stages of the conflict.

Shekel's Performance in the Market

Recent trading has shown the shekel displaying volatility, appreciating by 0.5% against the dollar on certain days but experiencing a 2% depreciation in October alone and a 5% decrease in the year to date. This fluctuating performance reflects the broader economic uncertainty tied to external and political factors.

Upcoming Announcements and Expectations

As the Bank of Israel prepares to release updated macroeconomic forecasts, all eyes will be on the news conference scheduled with Governor Amir Yaron. Investors are keenly awaiting insights into the central bank's future strategies and their effect on the financial landscape.

Frequently Asked Questions

What is the current interest rate set by the Bank of Israel?

The current benchmark interest rate set by the Bank of Israel is 4.5%.

How has inflation in Israel changed recently?

Inflation in Israel has risen to a 10-month high of 3.6% in August, up from 3.2% in the prior month.

What economic conditions are influencing the Bank of Israel's decision?

Geopolitical conflicts, a weaker shekel, and low economic growth are key factors influencing the Bank of Israel's decision to maintain interest rates.

Is there a likelihood of interest rate hikes in the near future?

Economists suggest there is little likelihood of rate hikes in the upcoming months given the current economic conditions.

What is the projected timeline for future interest rate changes?

The Bank of Israel has indicated that rates will likely remain unchanged until at least 2025.

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