The Bank of Israel Monetary Committee will announce its latest interest rate decision on Wednesday. The announcement has been delayed two days to avoid clashing with October 7 memorial ceremonies and the first anniversary of the start of the war. The consensus is that the Bank of Israel will not cut the rate and there are even those who believe that the rate might be raised for the first time since May 2023, when it was hiked to 4.75%.
The Bank of Israel Monetary Committee will be meeting at a particularly challenging time for the Israeli economy with the fighting continuing, inflation having climbed to 3.6% annually and volatility high in the financial markets, especially the foreign exchange market. Due to all this, there is little doubt that the interest rate won't be cut anytime soon, after the most recent cut of 0.25% to 4.5% was back at the start of January.
In its most recent interest rate decision in August, the Bank of Israel Monetary Committee forecast that the next rate cut would be unlikely to happen before the second quarter of 2025, if the rise in inflation is halted and stability returns to the financial markets.
"The door is open for further rises"
In the market there are those who believe that there could be an interest rate hike, mainly due to the price increases in the services components in the Consumer Price Index (CPI), which are driven by demand. This points to inflation stemming from wage hikes, and not only from the consequences of the war. Deutsche Bank wrote during the holiday, "We do not completely rule out an interest rate increase. If the geopolitical situation worsens further, with exchange of blows between Israel and Iran developing into a full conflict, concerns for financial stability - probably mainly through selling pressure on the exchange rate - suggest that the door remains open to an additional increase."
Bank Hapoalim chief financial markets strategist Modi Shafrir believes that the Bank of Israel will leave the rate unchanged but will take a more hawkish approach. He says, "Bank of Israel Governor Amir Yaron may emphasize that if the situation continues to develop, then the committee might consider another hike." He observes that if the Bank of Israel does decide to raise the interest rate, it will be among the few banks in the world that is conducting monetary restraint, when most Western countries are actually easing their economies.
Mizrahi Tefahot Bank chief economist Ronen Menachem stresses that the importance of this week's decision is in the messages that the Governor will convey. He says, "The governor's attitude on growth, the deficit, and the outlook for the future will affect the way the economic situation and the bond market are perceived."
The Bank of Israel's announcement is expected to include reference to changes in the economy and a call to the government to adopt a balanced budget. The upcoming budget carries special significance, due the recent downgrades by international rating agencies, Moody's and S&P. Both attached great importance to the delays in passing the budget and the government's foot dragging on the matter.
The economic situation is worsening
Since the last interest rate decision at the end of August, Israel's economic situation has worsened. The inflation rate is significantly higher than the upper limit of the Bank of Israel's stability target (3%), and the deficit continues to widen, and is forecast to continue growing until next month. On top of that, geopolitical risks have increased, with fighting intensifying in the north and continuing in the south.
The Bank of Israel will revise its forecasts on Wednesday. The predictions of the international ratings agencies indicate the possibility of a deeper recession compared with the most recent forecast issued by the bank, which saw growth of 1.5% this year and 4.2% in 2025. The ratings agencies cut growth forecasts to 0% in 2024 and 2% in 2025. According to the previous forecast, the deficit will meet the finance target and be set at 6.6%, and inflation will be at 3%. In Shafrir's estimation, the growth outlook presented by the bank has decreased, but it is not certain that it will reach the low levels presented by the ratings agencies. Menachem stresses that one of the questions preoccupying the markets regarding this week's decision is, "If the Bank of Israel switches to a zero growth forecast, it is likely that it will also want to send a reassuring message that the economy is not headed for a recession, otherwise it is a paradigm shift from the beginning of the war: of a strong economy that is flexible and experienced in dealing with crises."
Published by Globes, Israel business news - en.globes.co.il - on October 6, 2024.
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