Bank of Israel cuts interest rate

Bank of Israel Governor Amir Yaron credit: Eyal Izhar, Tali Bogdansky

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This is the first interest rate cut in Israel since March 2020, as the Bank of Israel Monetary Committee seeks to support the war-hit economy.

The Bank of Israel Monetary Committee, headed by Governor Prof. Amir Yaron, announced this afternoon that it is cutting the interest rate by 0.25% to 4.5%. This is the first interest rate cut in Israel since March 2020 at the start of the Covid pandemic.

The rate cut follows a run of 10 rate hikes between April 2022 and May 2023, which saw the rate rise from a historic low of 0.1% to 4.75%, as the Bank of Israel sought to combat rising inflation. The battle against inflation has come a long way in 2023, peaking at 5.3% in January and falling to 3.3% in November. Inflation is expected to fall further to 3% in the coming month - the upper limit of the annual 1%-3% target range. The Bank of Israel expects inflation to fall to 2.4% by the fourth quarter of 2024 and 2% by the fourth quarter of 2025.

Prof. Yaron expects today's rate cut will be the first of several this year. He said, "The research department’s forecast assesses that the interest rate will be 3.75%-4%, on average, in the fourth quarter of 2024 - a more moderate path of decline than that assessed by the market."

Alongside the interest rate decision, the Bank of Israel kept the 2024 growth forecast unchanged at 2% for each of 2023 and 2024 and sees 5% growth in 2025. The Bank of Israel added, "The forecast features an especially high level of uncertainty, including with regard to decisions that the government will need to make regarding how the budget will deal with the defense and civilian needs arising from the war."

The Bank of Israel sees the fiscal deficit widening to 4% at the end of 2023, up 0.3% from its previous forecast, rising to 5.7% in 2024, up from 5% in its previous forecast.

The Bank of Israel said, "In view of the war, the Monetary Committee’s policy is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity. The interest rate path will be determined in accordance with the continued convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy. "

Published by Globes, Israel business news - en.globes.co.il - on January 1, 2024.