Bank of Israel keeps rate unchanged, sees inflation rising

The Monetary Committee of the Bank of Israel announced that it left the interest rate unchanged at 4.5%, as expected. This is the fifth time in a row that the Bank of Israel has kept the interest rate unchanged, after cutting it from 4.75% in January.

The Bank of Israel is concerned about the growing deficit, the lack of a budget for 2025, geopolitical uncertainty and inflationary pressures. The Bank of Israel revised its inflation forecast for 2024 upward to 3.8%, and no longer sees it falling below 3%, the upper end of the annual target range, until July 2025.

“Since the outbreak of the war, and in recent months in particular, geopolitical uncertainty and its economic implications have increased,” the Bank of Israel said. “Along with financial uncertainty, this is also reflected in rising yield spreads between Israeli government bonds and US bonds, and in credit default swap spreads that are approaching record levels.”

Regarding inflation, the Bank of Israel added: “Inflation has continued its upward trend in recent months and is slightly above the upper limit of the target range. The rise in the inflation rate primarily reflects an increase in the rate of change in the prices of non-tradable components.”

The Bank of Israel continued: “In light of the ongoing war, the Monetary Committee’s policy focuses on stabilizing markets and reducing uncertainty, along with price stability and supporting economic activity. The path of interest rates will be determined in line with the convergence of inflation to its target, continued stability in financial markets, economic activity, and fiscal policy.”

The Bank of Israel also criticizes the government’s fiscal policy by adding: “The cumulative deficit in the government budget over the past 12 months continued to rise in July, reaching 8.1% of GDP. As long as there are no additional unexpected additions to the defense budget, it is expected to reach 6.6% by the end of 2024. The uncertainty surrounding the 2025 state budget, and the implementation of the adjustments required to reduce the deficit on an ongoing basis, contributes to an increase in the risk premium and is likely to weigh on the return of inflation to its target.”

The Bank of Israel also noted that other central banks have begun to cut interest rates. “Around the world, economic activity continues to expand, inflation is moderate, and markets are anticipating several rate cuts throughout the year by the Federal Reserve and the European Central Bank.”

This article was published in Globes, Israeli Business News – en.globes.co.il – on August 28, 2024.

© Copyright Globes Publisher Itonut (1983) Ltd., 2024.