Bank of Israel to Maintain Rates Despite Rising Inflation: Reuters Poll

By Steven Scheer

JERUSALEM – The Bank of Israel (BoI) is anticipated to maintain its short-term interest rate at 4.5% during its sixth consecutive policy meeting on Wednesday. Market analysts believe that rising inflation, driven by the ongoing Israel-Hamas conflict, will likely delay any rate reductions until next year, according to a recent poll.

All 14 economists surveyed forecasted that the central bank would keep the benchmark rate steady when the decision is revealed at 4 p.m. local time.

Israel’s annual inflation rate rose to a 10-month peak of 3.6% in August, up from 3.2% the month prior, surpassing the government’s target range of 1-3%. This follows a notable decline to 2.5% in February.

Conversely, the nation’s economy recorded a modest annual growth of just 0.7% in the second quarter, indicating a 0.9% contraction on a per capita basis.

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

Since October 7, 2023, Israel has been primarily engaged in combat against Hamas in Gaza while intensifying strikes against Hezbollah in Lebanon in response to rocket attacks. Concerns have also emerged regarding potential escalations involving Iran.

Alex Zabezhinsky, chief economist at Meitav Brokerage, mentioned that in usual circumstances, rising inflation alongside a depreciating currency and a tight labor market would typically prompt a rate hike. However, the current war situation has compelled the Bank of Israel to maintain its rates.

Central bank officials have expressed expectations of keeping rates steady until sometime in 2025, while rates in the U.S. and Europe may continue to decline. The bank had previously cut rates by 25 basis points in January but has opted to stabilize them since then.

Bank Hapoalim economist Victor Bahar stated that interest rate cuts are not currently being considered, though there is some market speculation about potential hikes in the coming months. He did, however, express skepticism regarding the likelihood of rate increases in a low-growth environment.

Bahar added that if the security situation leads to a sharper depreciation of the shekel, intervention by the Bank of Israel in the foreign exchange market might occur, similar to measures taken at the onset of the conflict.

The shekel’s performance has been inconsistent; it gained 0.5% against the dollar on Monday but has weakened by 2% so far in October and is down 5% for the year.

Additionally, on Wednesday, the central bank is set to release updated macroeconomic forecasts, with Bank of Israel Governor Amir Yaron scheduled for a news conference at 4:15 p.m.