Israel’s Central Bank Unlikely to Lower Rates Again in 2024, Deputy Governor States

JERUSALEM (Reuters) – The Bank of Israel is not expected to lower short-term interest rates at its final two policy meetings of 2024, according to Deputy Governor Andrew Abir. His comments come amid increasing inflationary pressures and ongoing geopolitical uncertainties.

The central bank has maintained the benchmark interest rate at 4.5% for five consecutive meetings, primarily due to inflation rising to 3.2%, while the conflict in Gaza continues, raising concerns about potential regional escalation.

After a reduction of 25 basis points in January, rates have remained unchanged. "It’s unlikely for us to be cutting rates until well into 2025," Abir stated, emphasizing that future decisions will depend on economic data. He mentioned that as long as the war’s uncertainty and disruptions in key industries persist, reducing interest rates will be challenging.

The next meetings to discuss interest rates are scheduled for October 9, November 25, and January 6, 2025. Israel’s inflation rate is anticipated to rise above 3.5% in the coming months, partly due to an upcoming increase in value-added tax at the start of 2025. However, it is expected to decrease back into the 1%-3% target range during the latter half of the year.

Abir remarked, "You have to see progress being made on inflation coming back down into the target range. We know it’s going to go up… we want to see that after that it starts to come down."

He indicated that much of the current inflation stems from supply-side issues, including a shortage of workers due to restrictions on Palestinian labor, military call-ups, and displacement of Israelis in the north resulting from ongoing rocket attacks.

"The war has lasted longer than we anticipated and is creating shocks in the real economy, with investment, particularly in construction, declining sharply," Abir noted.

He cautioned that lowering interest rates at this time could exacerbate the disparity between demand and supply, leading to further increases in housing costs, despite the economy having grown by only 1.2% in the second quarter. Investors, seeking higher returns amidst geopolitical risks, would find lower rates counterproductive.

"The currency could depreciate if you lower interest rates in an uncertain environment, which goes against market expectations," he explained.

Recently, the currency has been volatile but has appreciated by 3% against the dollar this month, fueled by concerns of an all-out war with Hezbollah or Iran and expectations that U.S. rates may drop in September.

Fiscal policy is also a consideration, with the war resulting in an increased budget deficit, causing frustration at the central bank regarding the government’s slow progress on a credible 2025 budget. This budget will likely necessitate spending cuts in non-growth sectors and tax increases.

"Due to the fiscal situation, we are adopting a more cautious and conservative approach to monetary policy," Abir stated. "We believe that a higher level of interest is necessary to maintain stability in the economy and markets."