Israel’s Central Bank Unlikely to Reduce Rates Again in 2024, Deputy Governor Says

JERUSALEM (Reuters) – The Bank of Israel is expected to maintain its short-term interest rates during the last two policy meetings of 2024 due to rising inflationary pressures and ongoing geopolitical uncertainties, according to Deputy Governor Andrew Abir.

Recently, the central bank decided to keep its benchmark interest rate at 4.5% for the fifth consecutive time, attributing the decision to concerns over inflation, which has reached a rate of 3.2%, amidst the ongoing conflict in Gaza and the potential for a broader regional escalation.

Earlier this year, the bank reduced rates by 25 basis points in January but has since opted for stability. "It seems unlikely that we would reduce rates until well into 2025," Abir told Reuters, emphasizing that future decisions will be guided by data trends.

He highlighted that the ongoing uncertainty related to the conflict and disruptions in critical industries complicates any potential rate cuts. The next rate decisions are scheduled for October 9, November 25, and January 6, 2025.

Israel’s inflation rate is projected to surpass 3.5% in the upcoming months, partly driven by a planned increase in the value-added tax in early 2025. However, officials anticipate that inflation could return to the target range of 1%-3% in the second half of the year. "We need to observe concrete progress toward bringing inflation back down to the target range," Abir noted. "While we expect inflation to rise temporarily, we want to see a subsequent decrease."

He pointed out that several supply-side factors are contributing to inflation, including workforce shortages linked to restrictions on Palestinian workers and military service commitments, as well as domestic displacement due to ongoing threats from Hezbollah.

Abir remarked, "The prolonged nature of the war has exceeded our expectations and is causing significant impacts on the economy. We are witnessing a notable decline in investments, especially in construction."

Cutting rates now could exacerbate the disparity between supply and demand, leading to increased housing costs, particularly as the economy grew by just 1.2% annually in the second quarter. During times of uncertainty, investors typically seek higher returns, making any rate cuts counterproductive and potentially resulting in currency depreciation.

The recent performance of the shekel has been erratic, yet it has risen 3% against the dollar this month, reflecting assumptions that a full-scale conflict with Hezbollah or Iran is likely, while the U.S. Federal Reserve may lower interest rates soon.

Fiscal policies also play a critical role, as the conflict has expanded the budget deficit. The Bank of Israel has expressed frustration over the government’s slow progress in developing a viable 2025 state budget, which would necessitate spending cuts and tax increases.

"Given the fiscal situation, we adopt a cautious and conservative approach to monetary policy," Abir stated. "We believe a higher interest rate is essential to ensure stability in the economy and markets."