The Bank of Israel will announce its latest interest rate decision next Monday (February 26) after cutting the rate by 0.25% to 4.5% at the beginning of January. In recent weeks, it has been widely believed that the Bank of Israel would prefer to wait before making a further cut. Now, especially since the publication of the inflation data at the end of last week, estimates have changed and more and more economists believe that we will see a further cut already this month.
The inflation data is the main reason for the change in the forecasts. Inflation has now fallen to an annual rate of 2.6% proving that price increases in Israel has leveled off and entered deep into the annual price stability target range.
"The decline in inflation since the beginning of the war is getting stronger and expanding," notes Meitav Dash chief economist Alex Zabezhinsky, who stresses that without price increases in fruits and vegetables, annual inflation in Israel is only 2.2%.
In addition, the GDP figures for 2023, which were published this week and showed that Israel a 20% contraction in the economy, on an annualized basis, in the fourth quarter of the year, has contributed to the estimates that the economy needs a boost from the Bank of Israel to help it recover. Because of the fall in inflation and the shrinking economy, Zabezhinsky believes that the bank will again lower interest rates this month. Goldman Sachs also predicts that the Bank of Israel may make another cut next week, to a rate of 4.25%.
The shekel exchange rate also contributes to these estimates. Although the shekel depreciated strongly in the first six weeks of the war, since November the shekel has strengthened and is now trading at NIS 3.64/$, well above its level before the war. Zabezhinsky says, "The Bank of Israel's concerns about threats to financial stability are not being realized. Even Moody's downgrading did not harm the local markets." Meitav points out that Israel's risk premium reflected in the CDS yield has also decreased in the last week.
"A real risk of an escalation"
On the other hand, Bank Hapoalim chief financial markets strategist Modi Shafrir stresses, "We estimate with a high probability that the interest rate will be left unchanged. A cut to a rate of 4.25% will only occur in April."
In his estimation, the main reason for the wait is the fact that the bank anticipates a limited number of cuts, and, "The research division of the Bank of Israel sees an interest rate of 3.75%-4% in 2024". That is, only 2-3 cuts in the seven interest rate decisions until the end of the year. In addition Shafrir says that both Governor Prof. Amir Yaron, and his deputy, Andrew Abir, made it clear after the last interest rate decision that "The rate of lowering the interest rate will be measured and must be conducted carefully, since the war is not yet over and there is a real risk of escalation with Hezbollah."
One of the concerns about rapid interest rate cuts stems from the interest rate gap between Israel and the rest of the countries of the Western world - which could endanger financial stability and the shekel. The US Federal Reserve was expected to make a first rate cut in March, but Fed Chairman Jerome Powell's statement that the members of the Open Market Committee do not see an imminent reduction led to the markets leveling off. At the same time cuts have been delayed in Europe as well. Shafrir points out that in the Eurozone the probability of an interest rate cut in March has dropped dramatically. The Eurozone insisted on zero growth in the last quarter of 2023, but even in the next decision, in April, the pricing in the markets for a cut is only 44%.
Published by Globes, Israel business news - en.globes.co.il - on February 21, 2024.
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