The Bank of Israel Monetary Committee, headed by Governor Prof. Amir Yaron, has decided to leave the interest rate unchanged at 4.75% for the first time in nearly 18 months. Economists had been divided over whether the rate would remain unchanged or be hiked by 0.25%. This decision ends a run of 10 consecutive rate hikes made by the Bank of Israel since April 2022.
In its explaining its decision, the Bank of Israel said that inflation is moderating. "Inflation is moderating, but is still high over a wide range of CPI components. Inflation over the past 12 months is 4.6%. Looking at the past six months, and even more so over the past three months, the pace of inflation is moderating in the prices of both tradable goods and non-tradables."
The Bank of Israel added, "One-year inflation expectations and forecasts are within the target range, near the upper bound. Expectations derived from the capital market for the second year onward are within the target range."
Along with the interest rate decision, the Bank of Israel raised its growth forecast for 2023 from 2.5% to 3%. But the Bank of Israel warned, "The main risk to the forecast is the materialization of a scenario in which the legislative and institutional changes with regard to the judicial system are accompanied by an increase in the country’s risk premium and continued depreciation of the shekel, an adverse impact to exports, and declines in domestic investments and in demand for private consumption."
The Bank of Israel also cut its inflation forecast for 2024 from 3.5% to 3%. Inflation in 2023 is predicted to be 3.5%, down from the Bank of Israel's previous forecast of 3.9% in April 2023 but still above the annual target range of between 1% and 3%.
The Bank of Israel stressed that, "while inflation appears to be slowing - it sees a real possibility of having to raise the interest rate in future decisions, if the inflation environment does not continue to moderate as expected."
The Bank of Israel sees the interest rate at 4.75%-5% in the second quarter of 2024.
Published by Globes, Israel business news - en.globes.co.il - on July 10, 2023.
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