As of: February 27, 2024, 4:35 p.m
By: Fabian Hartmann
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High defense spending and the risk of a major conflict call for caution: The Bank of Israel is against another interest rate cut.
Jerusalem - Israel's central bank has decided to leave interest rates in the country unchanged rather than cut them again.
It was only on January 1st of this year that the Bank of Israel revised the key interest rate downwards.
Last week, numerous economists had assumed that it would be able to cut its key interest rate for the second time in a short space of time this week.
However, the Israeli Central Bank's Monetary Policy Committee left the key interest rate at 4.5 percent, it announced at a press conference in Jerusalem on Monday.
The central bank also reiterated its January guidance on Monday, saying it is currently “focused on stabilizing markets and reducing uncertainty, alongside price stability and supporting economic activity.”
The US news portal
Bloomberg
quotes a statement that accompanied the decision.
A key reason for not cutting the key interest rate is probably Israel's concern that inflation could accelerate again in view of the war against Hamas that has been going on since October.
In a
Bloomberg
survey, economists were surprised by the Israeli central bank's decision not to cut interest rates further.
Many of them had previously thought a quarter-percentage point cut in the key interest rate was likely, given that Israel's economy is currently slowing and inflation is easing due to the war with Hamas.
The shekel pared losses following the announcement, according to
Bloomberg
information, closing the day little changed against the U.S. dollar.
President of the Central Bank of Israel continues to call for responsible financial policy
In a speech after the decision in Jerusalem, Israeli Central Bank Governor Amir Yaron said the central bank plans to maintain its loose policy on key interest rates in the future.
He emphasized that the Bank of Israel could still continue with interest rate cuts if inflation in the country stabilizes sustainably.
However, at this point in time, we don't want to make the mistake of lowering interest rates too quickly - and thus unintentionally contribute to a renewed flare-up of inflation.
“There is still uncertainty about the impact of the war on the inflation process,” Yaron continued.
That is why it is important to continue to pursue responsible financial policies “and communicate this to the markets, which are now more than ever following the activities in Israel,” he is
quoted as saying by
Bloomberg
.
Amir Yaron, President of the Central Bank of Israel © Nir Alon
The debate about a possible second key interest rate cut also shows what competing interest rate policy priorities the decision-makers in Israel are currently facing: Although the central bank is aware of the risks to the Israeli economy, at the same time it also warned that the government's high spending would be a reaction to the conflict could be an obstacle to further monetary easing.
In the last quarter of the previous year, the economy in Israel recorded an almost record decline.
In addition, those responsible were concerned about the volatility of the shekel and the downgrading of the credit rating.
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Decision against cutting interest rates: Bank of Israel acts in a similar way to central banks around the world
In contrast, with Israel's annual inflation decelerating over the past 12 months and reaching the government's target range of 1% to 3% for the first time in over two years, Israel's central bank currently has room to provide further stimulus.
The Bank of Israel's research department expects the interest rate to be between 3.75% and 4% in the fourth quarter of 2024, according to
Bloomberg
, a forecast that could mean up to four rate cuts this year, according to Yaron.
The economic decline at the end of last year also contrasts with the signs of a rapid recovery in 2024. This is particularly noticeable in private household consumption and on the labor market, with unemployment falling sharply again since an increase in October.
According to Bank Hapoalim, Israel's Purchasing Managers' Index moved from a contraction back towards expansion in January.
By forgoing another interest rate cut, Israel is also adapting to the current interest rate policy of global central banks.
Representatives of the US Federal Reserve recently made it clear that they are in no hurry to cut interest rates.
And the European Central Bank (ECB) also decided to pause interest rates in January.
Key interest rate cuts in Israel could continue in April
The interest rate cuts will continue in April with an increase to 4.25%, explains Gil Bufman, chief economist at Bank Leumi, according to
Bloomberg.
At least in the likely case, an updated central bank economic forecast predicts “relatively moderate growth in 2024 and significant acceleration” for the Israeli economy.
The greatest economic and financial uncertainty for Israel continues to be the further course of the conflict with Hamas. Especially since there is a risk that the fighting could spread along Israel's northern border, where the Israeli military exchanges fire with the Iran-backed Hezbollah supplies.