Will Bank of Israel raise rate on Wednesday?

Bank of Israel credit: Shutterstock
Bank of Israel credit: Shutterstock

Deutsche Bank says that as the geopolitical situation worsens there could be a rate hike but most analysts expect the rate to be left unchanged.

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.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Bank of Israel credit: Shutterstock
Bank of Israel credit: Shutterstock
Unframe founders credit: Yossi Yarom Israeli AI enterprise platform co Unframe raises $50m

Unframe’s turnkey AI solutions enable companies to solve any enterprise AI use case at scale with fully functional, customized AI solutions for businesses in a matter of hours, rather than months.

Combatica credit: Combatica Combatica launches next-gen VR AI training platform

The Israeli company's virtual reality platform includes 50 AI generated scenarios, seven maps and even situations for operating night vision.

Shekel credit: Shutterstock Vladirina 32 Shekel volatility after US tariffs announcement

The shekel is weakening sharply against the euro, which is gaining following the unveiling of Donald Trump's tariffs plan.

Minister of Finance Bezalel Smotrich credit: Noam Moskovitz Knesset Spokesperson Treasury assesses potential damage to Israel's US exports

Israel will be charged a higher tariff on its exports to the US - its biggest export customer - than Turkey and the UAE.

Iranian flag credit: Shutterstock Why inflation haunts Iran

With a month-on-month increase of 3.3% and an annual rate of 37.1%, inflation reflects the struggles of millions of Iranians.

APM merges with lawyers from Doron, Tikotzky Kantor, Gutman credit: Eyal Merilos APM merges with 12 lawyers from Doron, Tikotzky Kantor, Gutman

With the addition of these 12 lawyers, Amit Pollak Matalon & Co. will now have 135 lawyers.

US President Donald Trump credit: Reuters Sipa USA Israel on list as Trump unveils tariffs

Relatively low reciprocal tariffs will be imposed on Israeli goods sold in the US.

Deflated unicorn credit: Shutterstock Big Tech 50 reports more huge falls in startup valuations

Israeli R&D partnership Big Tech 50 reports that an investment of $2 million in Orcam made in 2021, shrank to just $31,000 at the end of 2024.

NextFerm technologies based on yeast credit: NextFerm Food-tech co NextFerm suspends operations

The company, which produces food ingredients in yeast without genetic engineering, cannot pay its debts and is seeking a buyer.

Minister of Finance Bezalel Smotrich credit: Shlomi Yosef OECD sees recovery in growth but high inflation

The OECD Israel Economic Survey 2025 recommends that the Israeli government take several restraining measures, in order to exit the economic storm created by the war.

Dano Ben-Hur credit: Dror Sithakol Statisticians contradict BoI on impact of housing finance deals

The Central Bureau of Statistics insists the impact of 20/80 buy now pay later financing deals on the real estate market and housing prices is minimal.

Governor of the Bank of Israel Amir Yaron  credit: Government Press Office Debt fears top Bank of Israel's concerns

Most unusually, Governor of the Bank of Israel Amir Yaron's press conference last week did not focus on inflation and the impending interest rate decision.

US President Donald Trump  credit: Reuters/Leah Millis Israel moves to avoid Trump's tariffs axe

Minister of Finance Bezalel Smotrich has signed an order canceling all tariffs on imports from the US. The impact will mostly be on agricultural produce.

Forbes Rich List credit: Shutterstock Maslowski Marcin Wiz founders ranked in Forbes 2025 Rich List

There are a few dozen Israelis listed in the 2025 Forbes Real-Time Billionaires List including Wiz founders Assaf Rappaport, Yinon Costica, Roy Reznik and Ami Luttwak.

SatixFy CEO Nir Barkan credit: Ariel Barkan Canada's MDA Space to buy Israeli satcom co SatixFy

MDA Space will pay $269 million for the Israeli company, including taking on a $76 million debt and a 75% premium on SatixFy's closing price on Nasdaq yesterday.

Raising dollars credit: Shutterstock Israeli startups raised over $1b in March

Israeli privately-held tech companies have raised $2.1 billion in the first three months of 2025, according to IVC-LeumiTech, up 24% from the corresponding quarter of 2024.

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018