The Bank of Israel Monetary Committee has announced that it has kept the interest rate unchanged at 4.5%, as expected. This is the fifth successive time that the Bank of Israel has left the interest rate unchanged, after cutting it from 4.75% in January.
The Bank of Israel is concerned about the widening deficit, the lack of a 2025 budget, geopolitical uncertainty and inflationary pressures. The Bank of Israel has revised its inflation forecast for 2024 upwards to 3.8%, no longer seeing it fall below 3%, the upper limit of the annual target range, until July 2025.
The Bank of Israel stated, "Since the outbreak of the war, and in recent months in particular, geopolitical uncertainty and its economic ramifications have increased. These, alongside the fiscal uncertainty, are also reflected in the high yield spreads between Israeli government bonds and US bonds, and in CDS spreads that are near record levels.
On inflation, the Bank of Israel added, "Inflation has been on an upward trend in recent months and is slightly above the upper bound of the target range. The rise in the inflation rate primarily reflects the increase in the rate of change in prices of the non-tradable components."
The Bank of Israel continued, "In view of the continuing 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 convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy."
The Bank of Israel also implies criticism of government fiscal policy by adding, "The cumulative deficit in the government budget in the past 12 months continued to increase in July, totaling 8.1% of GDP. To the extent that there won’t be additional unexpected additions to the defense budget, it is expected to be 6.6% at the end of 2024. The uncertainty surrounding the State budget for 2025, and the implementation of adjustments required to reduce the deficit on an ongoing basis, contributes to an increase in the risk premium and is liable to weigh on the return of inflation to its target."
The Bank of Israel also observed that other central banks are beginning to make interest rate cuts. "Worldwide, economic activity continues to expand, the inflation rate is moderating, and the markets are expecting several interest rate reductions over the course of the year by the Fed and the ECB."
Published by Globes, Israel business news - en.globes.co.il - on August 28, 2024.
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