The moderation of inflation and the appreciation of the shekel are not expected to lead the Bank of Israel to announce today (Monday) afternoon the reduction of the interest rate in its most recent interest rate decision for 2023. Most economists expect the interest rate to remain unchanged at 4.75 percent. This is despite the set of elements supporting the reduction – the background of the war, the slowdown in economic activity, and an unemployment rate of 10%. The shekel strengthened by about 9 percent against the dollar in the past month, and the annual inflation rate continued to decline, reaching 3.7 percent in October.
"Inflation is indeed on a downward trend, but it is still very high, and it is well above the Bank of Israel's target. So lowering the interest rate when we haven't even reached the top of the target is a relatively extreme move, it takes a lot of courage to do it," says Uri Glinfeld, chief economist at Psagot Investment House.
Leader Capital Markets Chief Economist Jonathan Katz, Photo: Zvika Dor
Leader Capital Markets also believes that the interest rate will remain in place tomorrow. Jonathan Katz, chief economist of Leader Capital Markets, told Israel Hayom, "The Bank of Israel is now emphasizing stability in the markets and is concerned about an increase in Israel's risk premium. Despite this, it is impossible to rule out the possibility of lowering the interest rate against the background of the moderation in the inflation environment and inflation expectations, the sharp appreciation of the shekel, and the expectation of a marked moderation in activity."
The two largest banks, Poalim and Leumi, also explained why they believe the interest rate is still not expected to decline tomorrow. In Bank Leumi's weekly survey, Chief Economist Gil Bafman writes: "We believe that the Bank of Israel is expected to leave the interest rate unchanged. However, it appears that the chances of an interest rate cut have greatly increased, apparently already in the decision after this week's decision, at the beginning of January 2024. This is against the background of the strengthening trend of the shekel, the continued expectation of a decline in the inflation environment in Israel, and an attempt to support domestic economic activity against the background of the weakening due to the fighting of the past two months."
Modi Shafrir, chief strategist in Bank Hapoalim's trading room, photo: Ilan Bashor
According to Modi Shafrir, market strategist at Bank Hapoalim's trading room, writes in his weekly survey that "the recovery of economic activity in the past month, the accommodative fiscal policy in Israel, and the clarification by central bank officials around the world that there is nothing to discuss about lowering the interest rate in the near term, do not support an imminent interest rate cut in Israel as well."
"We remain in our assessment that the interest rate will remain unchanged at the upcoming decision, and that there is a relatively small chance of an interest rate cut at the beginning of January."
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