In a recent statement, deputy governor Andrew Abir of the Bank of Israel indicated that the central bank is unlikely to lower short-term interest rates at its remaining two 2024 policy meetings. This decision comes in light of rising price pressures and persisting geopolitical risks, including the ongoing Gaza war and fears of regional conflict escalation.
The central bank has maintained its benchmark interest rate at 4.5% for the fifth consecutive decision, citing concerns over inflation, which has climbed to a 3.2% rate. While the bank eased rates by 25 basis points in January, it has kept rates steady since then.
Abir emphasized that any decision to cut rates would be data-dependent and unlikely until well into 2025. Factors such as uncertainty surrounding the war and dislocation in key industries make it challenging for the bank to reduce interest rates.
Israel's inflation rate is expected to exceed 3.5% in the coming months, driven partly by a planned increase in the value-added tax in 2025. However, the rate is projected to ease back into the 1%-3% target range in the second half of the year.
Abir noted that much of the inflation is supply-side driven, with factors such as a shortage of workers contributing to the price pressures. The prolonged war has caused disruptions in the real economy, leading to a decline in investments, particularly in construction.
Lowering rates at this time could widen the gap between demand and supply, resulting in price increases, particularly in housing costs. Additionally, in a period of uncertainty and geopolitical risk, investors seek higher returns, making it necessary to maintain a higher level of interest rates for economic and market stability.
The Israeli shekel has been volatile but has gained 3% against the dollar this month amid expectations of an all-out war with Hezbollah or Iran. The Federal Reserve's potential rate cut in September also impacts currency movements.
Fiscal policy plays a role as well, with the war increasing the budget deficit and delays in creating a credible 2025 state budget. The central bank emphasizes the need for caution and conservatism in monetary policy to ensure economic and market stability.
In conclusion, the Bank of Israel's decision to hold rates steady reflects a cautious approach to monetary policy in the face of rising price pressures, geopolitical risks, and fiscal challenges. This analysis highlights the importance of understanding central bank decisions and their impact on individuals' finances and investments.