Bank of Israel to Maintain Rates Despite Anticipated Cuts from Fed and ECB: Reuters Poll

By Steven Scheer

JERUSALEM – The Bank of Israel (BoI) is expected to maintain its short-term interest rates for a fifth consecutive meeting on Wednesday, as rising price pressures and the ongoing Israel-Hamas conflict create uncertainty regarding the timing of any potential rate cuts, according to a recent poll of economists.

All 15 economists surveyed anticipate that the central bank will keep its benchmark rate at 4.5% when the decision is announced at 4 p.m. local time.

Israel’s annual inflation rate increased to 3.2% in July, up from 2.9% the previous month, surpassing the bank’s target range of 1-3% after dropping as low as 2.5% in February.

Conversely, the economy grew by an annualized rate of just 1.2% in the second quarter, a figure that fell short of expectations.

Anatoliy Shal, an economist at JP Morgan, expressed that the BoI is likely to prioritize rising inflation data over indications of slower growth. He noted that the central bank will err on the side of caution in the near term, especially given the tense geopolitical climate.

Shal and most economists predict that rates will remain steady for at least a few more months due to increasing inflation, a relaxed fiscal policy, and heightened risk premiums influenced by the protracted conflict in Gaza and concerns about potential escalation involving Hezbollah and Iran.

Kevin Daly, an economist at Goldman Sachs, stated that the prevailing uncertainty hinders confidence in predicting when the next rate cut may occur.

The budget deficit has surged to 8.1% of gross domestic product, notably above the 2024 target of 6.6%, largely due to increased defense spending.

In contrast, the U.S. Federal Reserve is anticipated to lower rates in September, and the European Central Bank is likewise expected to reduce borrowing costs next month.

Jonathan Katz, Chief Economist at Leader Capital Markets, noted that unlike the Fed and ECB, the Bank of Israel will continue to highlight various inflationary risks, including fiscal policy concerns, a tight labor market, pressures on housing prices, and potential supply disruptions.

Despite these challenges, the shekel has recently appreciated to a month-high of around 3.65 per dollar, showing a gain of 3% in August. This uptick is attributed to the belief that the current conflict remains contained and will not escalate into a broader war involving Hezbollah or Iran, in addition to expectations of forthcoming U.S. rate cuts.

Earlier this year, the monetary policy committee cut its key rate by 25 basis points, following a series of 10 consecutive rate hikes that began with an increase from an all-time low of 0.1% in April 2022, before pausing last July.

Daly noted a relatively dovish stance regarding Israeli inflation and interest rates, suggesting that inflation will likely decrease in the coming months and that a reduction in shekel volatility could allow the BoI to resume its cutting cycle later this year.