Bank of Israel Deputy Governor Predicts No Rate Cuts Amid Rising Inflation and Geopolitical Risk
In a recent statement, Bank of Israel Deputy Governor Andrew Abir indicated that the central bank is unlikely to lower short-term interest rates at its upcoming policy meetings in 2024. This decision comes in light of increasing price pressures and ongoing geopolitical uncertainties, such as the Gaza war.
Despite holding the benchmark interest rate at 4.5% for the fifth consecutive time, concerns over inflation, which has reached 3.2%, remain at the forefront. The central bank had previously reduced rates by 25 basis points in January but has since maintained a steady stance.
Abir emphasized that any future rate cuts are dependent on data and economic developments, suggesting that a reduction is not expected until well into 2025. The uncertainty surrounding the war and disruptions in key industries make it challenging to consider lowering interest rates at this time.
The inflation rate in Israel is projected to exceed 3.5% in the coming months, partly due to an increase in value-added tax scheduled for the beginning of 2025. However, Abir anticipates a return to the target range of 1%-3% in the latter part of the year.
Factors contributing to inflation include supply chain issues, such as a shortage of workers, restrictions on Palestinian labor, military service call-ups, and displacements due to conflict. The prolonged war has led to economic shocks, particularly affecting investments in sectors like construction.
Abir warned that lowering rates now could exacerbate inflation and widen the gap between demand and supply, leading to price hikes, especially in housing costs. Additionally, investors seek higher returns during uncertain times, which could be further impacted by monetary policy changes.
The Israeli shekel has experienced volatility but has strengthened against the dollar amidst expectations of continued conflict with Hezbollah or Iran. Meanwhile, the Federal Reserve's potential rate cuts in September may influence global currency movements.
Fiscal policy is also a key consideration, with the war contributing to a higher budget deficit. The central bank is urging the government to create a credible 2025 state budget that includes spending cuts and tax increases to maintain economic stability.
In conclusion, the Bank of Israel's decision to hold interest rates reflects a cautious approach to monetary policy amid inflationary pressures and geopolitical risks. Understanding these dynamics can help individuals make informed decisions about their finances and investments in the current economic climate.