Israel Maintains Interest Rate as Economy Slowly Recovers

Israel Central Bank Maintains Steady Interest Rate

The Bank of Israel's Monetary Committee has opted to maintain the interest rate at 4.5%. This decision reflects the ongoing geopolitical developments in the region along with a moderate pace of economic recovery. Various sectors are still grappling with supply constraints, which are hindering the closing of the gap between actual GDP and its long-term expected level.

Current Inflation and Economic Outlook

The inflation rate has been recorded at 3.4%. Changes in taxation, particularly an increase in VAT, alongside persistent supply challenges and excess demand, are expected to elevate inflation in the first half of the fiscal year. Nevertheless, it is anticipated that inflation will moderate within the target range in the latter half of the year.

GDP Growth Projections

The Research Department has projected a modest GDP growth of 0.6% for the year ahead, followed by a sharper increase to 4.0% in 2025, which is a slight upward revision from previous forecasts. Looking further into the future, a GDP growth rate of 4.5% is expected in 2026. Employment statistics indicate minor enhancements in participation and employment rates, accompanied by a slight drop in broad unemployment rates and gradual rises in wages.

Risk Premium and Currency Strength

Notably, the country's risk premium has experienced a considerable decrease, as evidenced by the trends in the 5-year CDS, the spread of dollar-denominated government bonds, and the yield on shekel-denominated bonds. However, the current levels of risk remain high compared to figures prior to the onset of conflict in the region.

Shekel’s Performance Against Major Currencies

Since the last interest rate announcement, the Israeli shekel has appreciated approximately 0.5% against the US dollar, 2.4% against the euro, and 1.9% in terms of the nominal effective exchange rate. This strengthening of the shekel reflects a degree of confidence in the local economy.

Housing Market Dynamics

The housing market has shown continued upward momentum, with an annual increase in housing prices reaching 6.7%. However, activities in the construction sector remain below pre-conflict levels, primarily due to pressing manpower shortages and other logistical challenges.

Monetary Policy Focus

In light of the ongoing geopolitical tensions, the Monetary Committee's policy is primarily aimed at stabilizing the markets and reducing uncertainty, while ensuring price stability and fostering economic growth. Future adjustments to the interest rate will be closely linked to the convergence of inflation towards its target, the stability of the financial markets, general economic activity, and fiscal policies in place. The next interest rate decision is scheduled for publication on a specific future date.

Frequently Asked Questions

What led to the Bank of Israel's decision to keep interest rates steady?

The decision stemmed from geopolitical developments and a moderate economic recovery, amidst ongoing supply constraints.

What is the current inflation rate in Israel?

The current inflation rate stands at 3.4%, with expectations of influencing factors leading it to fluctuate in the coming months.

How does the shekel compare to other currencies?

The Israeli shekel has appreciated against the US dollar and the euro, showcasing its strengthening position amidst economic changes.

What are the growth projections for Israel's GDP?

The GDP growth is projected at 0.6% for the upcoming year, followed by an increase to 4.0% in 2025, and an anticipated 4.5% in 2026.

How is the housing market performing in Israel?

The housing market has seen a rise in housing prices, with a significant annual increase, although construction activities are constrained by manpower shortages.

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