Analysts unsure on Bank of Israel rate call

The Bank of Israel Monetary Committee will announce its latest interest rate decision tomorrow afternoon (January 1). Since the outbreak of the war in October, analysts have predicted that the Bank of Israel will try to cut interest rates as quickly as possible in order to stimulate the economy but analysts are divided on the appropriate urgency and timing of the interest rate cuts.

Since May 2023, the interest rate in Israel has remained at 4.75%, after rising from 0.1% in April 2022. Bank Hapoalim says that at the end of last week the market was pricing a 70% likelihood of a rate cut on Monday and a 75% likelihood of an additional rate cut at the end of February.

Bank Hapoalim chief economist Modi Shafrir says, “We estimate a probability similar to market expectations for an interest rate cut this week, but a relatively low probability that the central bank will lower the interest rate twice in the first quarter of the year.”

On the other hand, Bank Leumi estimates that the Bank of Israel Monetary Committee will prefer not to lower the interest rate tomorrow and postpone the cut to a later date, so that it can continue to focus on the stability of the financial markets in Israel which “continue to reflect a high level of risk relative to Israel.”

Bank Leumi chief economist Gil Buffman wrote in his survey, “The risks to the forecast stem from an escalation in the Swords of Iron War, a significant increase in shipping prices to Israel and disruptions in the supply of selected products to Israel.” Disruptions in the supply of imported products to Israel in the Red Sea can cause an increase in shipping prices could reignite supply inflation. Buffman added that there could be a a change in taxation policy due to the expected increase in the government’s budget deficit. Meanwhile, he points out, “The extension and expansion of easier terms adopted by the banking system is another policy tool,” which allows the Bank of Israel to maintain the interest rate at its current level for a longer period.

Bank Hapoalim is also very circumspect in its predictions. Victor Behar, director of the economic department at Bank Hapoalim, says “The sharp appreciation in the shekel exchange rate supports an early interest rate cut already on Monday.” However, he adds, the Governor has stressed in his comments in recent weeks the importance of maintaining stability, so according to Behar there is still room for Amir Yaron to postpone the interest rate cut.

Against the backdrop of uncertainty, Mizrahi Tefahot Bank has also published conflicting estimates regarding the interest rate decision. Mizrahi Tefahot Bank chief strategist Yonie Fanning believes the Bank of Israel will cut the interest rate on Monday by 0.25%, and expects the rate cuts in the coming decisions to be more aggressive than macroeconomic forecasts predict with rate falling to 3% by the end of 2024 (the Bank of Israel forecasts an end of year rate of 3.75%-4%). On the other hand, the bank’s chief economist, Ronen Menachem, believes that the monetary committee will postpone Monday’s interest rate cut until a later date and will continue to focus on market stability.

Inflation is set to fall but there are concerns it could rise again

The battle against inflation has come a long way in 2023, peaking at 5.3% in January and falling to 3.3% in November. The latest Bank of Israel forecast sees inflation moderating further in 2024 and falling to 3%, the limit of the target range. However, the uncertainty over could change the inflastionary picture.

The Bank of Israel said in its forecast. “The basic forecast we presented estimates the impact of the war, assuming that the main part of it will be on one front against the terrorist organizations in Gaza and its consequences will continue into 2024, with decreasing intensity. A further change in the scope and intensity of the war will of course have a material impact on actual economic developments.”

Another factor that is indirectly related to the war and is a particularly problematic issue for the Bank of Israel, is the 2024 budget. The Bank of Israel Governor has said repeatedly that the government must rein in its spending to improve the 2024 budget, which should include the costs of the war and reconstruction in the affected areas.

“There is a budget limit and no endless resources. We cannot write an open check,” Yaron told the Knesset State Audit Committee about two weeks ago, “The Ministry of Defense must become more efficient and not increase the budget beyond what is necessary. It is true that there will be changes in strategy and tactics and they will require equipping so that more funds will be required, but just as adjustments are made in all state budgets, the defense budget also needs to be tightened. Budgets need to be directed to issues that support growth and diverted from things that do not support growth.”

Published by Globes, Israel business news – en.globes.co.il – on December 31, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.