Bank of Israel Maintains Interest Rate Amidst Ongoing War stays at it's position - 4.75%

In a closely watched decision, the monetary committee of the Bank of Israel has chosen to keep the country's interest rate steady at 4.75%, in line with most economic forecasts. This move, despite the ongoing war that has persisted for 52 days, sets the stage for a potential reduction in January 2024, marking the first decrease since the initial cut in April 2020 during the early days of the COVID-19 pandemic.

The Bank of Israel's announcement emphasizes its commitment to stabilizing markets, reducing uncertainty, ensuring price stability, and supporting economic activity in the face of the ongoing conflict. The interest rate trajectory will be contingent on the war's developments and resulting uncertainties. Once financial market stability is established and inflation moderates towards the target range, the focus can shift towards supporting economic activity.

The decision, made amidst a significant economic slowdown due to the war, includes the mobilization of workers into the military and a recent decline in the exchange rates of the dollar and the euro. Despite these challenges, the Bank of Israel cites the current high inflation rate of 3.7%, exceeding the government's target range of 1%-3%, as a factor in their decision, prioritizing the control of inflation over an immediate reduction in interest rates to assist businesses and households.

The announcement notes that economic indicators, while showing an anticipated decline in economic activity, also suggest signs of recovery in some sectors after several weeks of war. Inflation has moderated but remains above the target, and the exchange rate, after initial volatility, has stabilized.

The Bank of Israel's research division has adjusted its macroeconomic forecast, anticipating a GDP growth rate of 2% in 2023 and 2024, compared to previous estimates of 2.3% and 2.8%, respectively. The inflation rate for the next four quarters is expected to be 2.4%, and the interest rate is projected to be 3.75/4.00% in the fourth quarter of 2024.

Acknowledging the financial impact of the war, the Bank of Israel expects gross war expenses, including defense expenditures and compensations, to reach NIS 198 billion. While lowering interest rates could alleviate financial burdens for households and businesses, the bank remains cautious, choosing to wait for more favorable economic conditions.

The decision comes at a time when the term of Governor Prof. Amir Yaron has been extended by five years. Sources close to the governor assert that recent interest rate decisions align with sound monetary policy and are unrelated to the extension of his term.