Bank of Israel Maintains Interest Rates Amid Geopolitical Tensions

By Steven Scheer

JERUSALEM (Reuters) – The Bank of Israel left interest rates unchanged for the eighth consecutive meeting on Monday, citing expectations of higher inflation and economic uncertainty stemming from Israel’s ongoing war with Hamas in Gaza.

Central bank governor Amir Yaron suggested that rate reductions could be possible if price pressures ease. Policymakers expressed concern about Israel’s investor risk premium, which fell after a spike at the war’s onset on October 7, 2023. The benchmark interest rate remains at 4.50%.

“The Monetary Committee continues to implement a cautious monetary policy, reflecting the need to deal with the continued geopolitical and economic uncertainty,” Yaron stated. He noted that the balance of inflation risks is tilted upwards.

Israel’s annual inflation dropped to a four-month low of 3.4% in November but remains above the government’s 1-3% target. Yaron indicated that any potential rate reductions would depend on data trends.

“If we see further improvement in the risk premium and inflation surprises positively, we could act accordingly,” he explained. Conversely, if inflation remains elevated, a continuation of restrictive policy may be necessary.

Following the inflation slowdown and economic growth deceleration during the Gaza war, the Bank of Israel had previously cut rates by 25 basis points last January. Twelve of the thirteen analysts surveyed by Reuters anticipated no changes on Monday.

In October, the central bank cautioned about possible rate increases should inflation remain high, primarily due to war-related supply chain issues. Yaron anticipated that inflation may rise further in the first half of 2025 due to supply constraints and higher taxes before returning to target in the second half.

The bank’s economists project interest rates to decline to 4.0-4.25% by Q4 2025. In conjunction with the rates decision, updated macro estimates predict 4% economic growth for this year and 4.5% for 2026, with inflation easing to 2.6% in 2023 and 2.3% in 2026.

The economy showed signs of recovery with an annualized growth rate of 3.8% in the third quarter, following nearly stagnant growth in previous months. Yaron acknowledged ongoing challenges posed by the war and uncertainty. The shekel experienced a slight appreciation against the dollar post-decision.