Bank of Israel Cuts Interest Rates Amidst Economic Uncertainty and War Impact

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by Ifi Reporter Category:Capital Market Jan 1, 2024

In response to the economic challenges posed by the ongoing war since October and rising government deficits, the Bank of Israel has decided to cut interest rates by 0.25% to 4.5%. The move comes as the central bank acknowledges the significant economic consequences of the conflict, emphasizing the high level of uncertainty regarding its scope and duration.

Market Disagreement and Expectations:

The decision has sparked differing opinions in the capital market, with some predicting two consecutive interest rate cuts. Modi Shafferer, market strategist at Bank Hapoalim's trading room, estimates a single cut in the upcoming quarter. The government's deficit, expected to reach 6%, has heightened concerns, potentially leading to large government mobilizations in the capital market.

The Bank of Israel cites the war's impact on real activity and heightened uncertainty as primary factors in its decision. Despite a recovery in financial markets and a strengthened shekel against major currencies, the central bank emphasizes the moderation of inflation rates. The research division forecasts GDP growth of 2% in 2023 and 2024, with a significant 5% growth expected in 2025, albeit acknowledging the high level of uncertainty.

Economic Experts and Stakeholder Reactions:

Economic experts, such as Victor Behar from Bank Hapoalim, express caution, noting the marginal impact of the interest rate cut. Behar suggests that while an early reduction is possible, the risks facing the economy may slow down the pace of future rate cuts. Various stakeholders, including the Chairman of the Knesset's Finance Committee, MK Moshe Gafni, and business leaders, welcome the decision, anticipating positive effects on mortgage payments and economic activity.

While business leaders like Dr. Ron Tomer and Dobi Amitai commend the decision, the president of the Chamber of Accountants, CPA Chen Schreiber, expresses disappointment, advocating for a more significant rate reduction during these challenging times. Industry-specific responses, such as Raul Sargo of the Haaretz Contractors, highlight the potential relief for sectors like construction.

Implications for Citizens:

Individuals, too, may feel the impact of the rate cut. Gil Stav, CEO of Blender Israel, sees the decision as significant for its message and potential effects on personal finances. The lowering of interest rates may signal a shift in economic trends, easing credit consumption but potentially affecting returns for depositors and currency rates.

As the nation grapples with the complexities of war and economic challenges, the Bank of Israel's decision reflects a delicate balance between stimulating economic activity and managing uncertainties on various fronts.

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