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
Israeli apartments Credit: Shutterstock Apartments sold and rented

A selection of recent real estate deals in Israel in Tel Aviv, Holon, Rehovot, Kiryat Tivon, Shlomi and Beersheva.

THAAD anti missile system credit: The US Army Ralph Scott Wikimedia US deploys more THAAD, Patriot batteries in Israel - report

Amid rising regional tensions the US is bolstering Israel's air defense, Saudi state-owned TV channel Al Arabiya reports.

Tel Aviv Stock Exchange credit: Shutterstock TASE tumbles in Wall Street's wake

Dual-listed stocks have again been hard hit, but the banks are also down sharply.

Donald Trump and Benjamin Netanyahu credit: Avi Ohayon Netanyahu due in Washington to discuss tariffs

According to news website Axios, Prime Minister Benjamin Netanyahu will be the first leader to meet President Trump after the latter's announcement of sweeping import tariffs.

Yoni Assia CEO eToro Credit: PR eToro defers IPO amid market turmoil

The online trading platform had planned to begin meetings with investors this week.

Minister of Finance Bezalel Smotrich credit: Shlomi Yosef Smotrich meets wrong man in Washington

Minister of Finance Bezalel Smotrich tried to persuade Secretary of the Treasury Scott Bessent to soften the tariff blow on Israel - only Bessent isn't responsible for the matter.

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.

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018