Tomorrow at 16:00, the Bank of Israel will announce the level of the interest rate in the economy, and it seems that this time it will be a particularly dramatic decision. Since the interest rate rose to 4.75% in May, a 16-year high, it has remained unchanged.
It now appears that all macroeconomic conditions are ripe for lowering interest rates, which will make it easier for businesses and households dealing with the economic burden of loan and mortgage payments.
Bank of Israel, Photo: Oren Ben Hakon
Therefore, most economists believe that the interest rate will decline tomorrow by a quarter of a percentage point to 4.5 percent, and a smaller number do not rule out the possibility that the interest rate will remain unchanged at this stage. Last Friday, the probability of lowering the interest rate by 0.25 percent, which is embodied in the interest rate market, was 70 percent. In addition, most economists believe that the interest rate will decline by another 0.25 percentage points in February as well, to 4.25 percent.
Modi Shafrir, chief market strategist at Bank Hapoalim, tends to believe that the Bank of Israel will choose to cut the interest rate tomorrow by 0.25 percent. Alongside the factors supporting an imminent interest rate cut, Shafrir notes the moderation of inflation and the low November CPI, the expected sharp contraction in economic growth in the fourth quarter, and the expectation of negative per capita growth over the next year.
Shafrir adds that the decline in volatility in the financial markets and the sharp appreciation of the shekel also support a reduction in the interest rate tomorrow.
Modi Shafrir, chief strategist in Bank Hapoalim's trading room, photo: Ilan Bashor
Furthermore, Shafrir notes that increased expectations of an interest rate cut in the US will also influence the Bank of Israel's decision. In conclusion, Shafrir notes that the market is already pricing in an interest rate cut on Monday with a very high probability, so that an actual interest rate cut is hardly expected to have an impact on the foreign exchange market.
Challenging decision
In contrast to Shafrir, Dr. Gil Michael Bafman, Chief Economist of Bank Leumi, believes that the Bank of Israel is expected to leave the interest rate unchanged this week, despite the reasons supporting an interest rate cut. Bafman explains, "The Bank of Israel is expected to debate this week between the first reduction of the interest rate and leaving it unchanged for another period. The factors supporting an interest rate reduction are the continued decline in the inflation environment recently and an expected entry into the price stability target range in the near future. In addition, the strengthening of the shekel in the past two months to a level higher than its prewar level also supports lowering the interest rate.
In contrast, the continued high level of uncertainty in the economy as a result of the fighting in the south and north and the uncertainty regarding the government's fiscal policy next year are expected to support an additional wait by the Bank of Israel before starting the process of lowering the interest rate."
It seems that in the upcoming decision, the Bank of Israel will give greater weight to factors supporting keeping the interest rate unchanged, but in the future it will have to give great weight to the decline in inflation and to the strengthening of the shekel in interest rate decisions, despite criticism of budgetary conduct and its effect on interest rate decisions in the context of the "policy mix," Bafman concludes, adding that looking ahead, the Bank of Israel interest rate is expected to decline gradually over the coming year by about 100 basis points cumulatively. From the current level of 4.75% to about 3.75%.
"Interest rate policy in Israel is managed independently of policy in the US"
Meanwhile, the business sector is increasing the pressure on the Governor to lower the interest rate as early as tomorrow. Ahead of the Bank of Israel's decision on the interest rate tomorrow, Uriel Lin, president of the Association of Israeli Chambers of Commerce and former Commissioner of State Revenue, wrote to Prof. Amir Yaron, Governor of the Bank of Israel, demanding that the Bank of Israel take more into account the Israeli business sector and less into policy decisions of the US central bank.
Lin also argues that only the Bank of Israel has the authority to deal with the banks' enormous profits while reducing the fees imposed on the business sector and households.
Lin warns and points overseas in the context of the Bank of Israel's interest rate policy: "I believe that interest rate policy in Israel is overmanaged, depending on interest rate policy in the United States.
Because of the dollar's rise, Photo: GettyImages
Indeed, there is certainly reciprocal relations, and certainly there is a direct effect, but the Bank of Israel's interest rate policy must be derived more from the situation of our business sector, from the special needs of our business sector, and from the difficult conditions with which a large part of the business sector is currently coping. And there are no safe jobs here. There are businesses here, mainly medium and small, that were built at the risk of family capital and many years of labor. In my assessment, the Bank of Israel gave more weight to interest rate policy in the US than to the needs of our business sector, especially at this time."
According to Revital Roth, Director of the Analysis Department at Dun & Bradstreet, "After the stabilization of the exchange rate and the moderation of inflation, we believe, like many in the economy, that the time has come to lower the interest rate. In our assessment, the continuation of the Bank of Israel's policy will be determined in accordance with the development of the war. To the extent that stability in the financial markets becomes entrenched and the inflation environment continues to moderate, monetary policy will be able to focus more on supporting economic activity, i.e., lowering the interest rate. However, against the background of the decline in demand and alongside supply-side constraints due to the war, there is also great uncertainty regarding the development of inflation in the near future.
The risk of depreciation of the shekel, against the background of recent exchange rate volatility, still poses a risk to the inflation rate. Therefore, in our assessment, even in the upcoming interest rate decision, the Bank of Israel will choose to keep the interest rate in place for the moment."
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