Will Bank of Israel raise rate on Wednesday?

The Bank of Israel’s Monetary Committee will announce its latest interest rate decision on Wednesday. The announcement was postponed for two days to avoid conflicting with the October 7 commemorations and the first anniversary of the start of the war. The consensus is that the Bank of Israel will not cut the interest rate, and there are even those who believe that the interest rate may be raised for the first time since May 2023, when it was raised to 4.75%.

The Bank of Israel’s Monetary Committee will meet at a particularly difficult time for the Israeli economy with ongoing fighting, inflation rising to 3.6% annually and high volatility in financial markets, especially the foreign exchange market. As a result of all this, there is no doubt that the interest rate will not be cut anytime soon, after the last cut of 0.25% to 4.5% took place at the beginning of January.

In its latest interest rate decision in August, the Bank of Israel’s Monetary Committee predicted that the next rate cut was unlikely to occur before the second quarter of 2025, if inflation stops rising and stability returns to financial markets.

“The door is open to greater heights.”

There are those in the market who believe that there could be a rise in interest rates, mainly due to rising prices for the services components of the Consumer Price Index (CPI), which are driven by demand. This refers to inflation resulting from rising wages, not just the consequences of the war. “We do not completely rule out an increase in interest rates,” Deutsche Bank wrote over the holiday. “If the geopolitical situation worsens further, with the exchange of blows between Israel and Iran developing into a full-fledged conflict, concerns about financial stability – perhaps mainly through selling pressure” on the exchange rate – will rise. “It indicates that the door remains open for additional increases.”

Modi Shafrir, chief financial markets strategist at Bank Hapoalim, believes the Bank of Israel will leave interest rates unchanged but will take a more hawkish approach. He says: “Bank of Israel Governor Amir Yaron may confirm that if the situation continues to develop, the committee may consider another increase.” He notes that if the Bank of Israel decides to raise interest rates, it will be among the few banks in the world exercising monetary restraint, while most Western countries are already easing their economies.

The chief economist at Mizrahi-Tefahot Bank, Ronen Menachem, stressed that the importance of this week’s decision lies in the messages that the governor will convey. “The governor’s position on growth, the deficit and future expectations will influence the way the economic situation and the bond market are viewed,” he says.

The Bank of Israel’s announcement is expected to include a reference to changes in the economy and a call on the government to adopt a balanced budget. The upcoming budget carries special importance, given the recent cuts by the international rating agencies, Moody’s and Standard & Poor’s. Both of them attached great importance to the delay in approving the budget and the government’s slowness in the matter.

The economic situation is getting worse

Since the last decision on the interest rate at the end of August, the economic situation in Israel has deteriorated. The inflation rate is well above the upper limit of the stability target set by the Bank of Israel (3%), and the deficit continues to widen, and is expected to continue growing until next month. Moreover, geopolitical risks have increased, with fighting intensifying in the north and continuing in the south.

The Bank of Israel will review its forecasts on Wednesday. The forecasts of international rating agencies indicate the possibility of a deeper recession compared to the latest forecasts issued by the bank, which saw growth of 1.5% this year and 4.2% in 2025. The rating agencies reduced growth expectations to 0% in 2024 and 2% in 2025. According to Previous expectations, the deficit will achieve the fiscal target set at 6.6%, and inflation at 3%. In Schaffrer’s estimation, the growth forecasts presented by the bank have declined, but it is not certain that they will reach the low levels presented by the rating agencies. Menachem stresses that one of the questions occupying markets regarding this week’s decision is: “If the Bank of Israel switches to a zero-growth forecast, it will likely also want to send a reassuring message that the economy is not headed toward growth.” Recession, otherwise it is a qualitative shift since the beginning of the war: a strong, flexible economy with experience in dealing with crises.

Published by Globes, Israel Business News – en.globes.co.il – on October 6, 2024.

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