In a recent statement made by deputy governor Andrew Abir, it was revealed that the Bank of Israel is not expected to reduce short-term interest rates at its upcoming policy meetings in 2024. This decision comes as a response to increasing price pressures and ongoing geopolitical risks in the region.
The central bank has maintained its benchmark interest rate at 4.5% for the fifth consecutive decision, citing concerns about inflation that has surged to a rate of 3.2%. The recent Gaza war and fears of its escalation into a broader regional conflict have further added to the economic uncertainty in the country.
According to Abir, it is unlikely for the bank to decrease interest rates until well into 2025. This decision is heavily dependent on the prevailing data and factors such as the war and disruptions in key industries.
The inflation rate in Israel is projected to rise above 3.5% in the coming months, primarily due to the planned increase in the value-added tax at the beginning of 2025. However, the bank anticipates a gradual return of inflation to its target range of 1%-3% in the later part of the year.
Abir highlighted that much of the inflationary pressure comes from the supply side, including a shortage of workers. Factors such as restrictions on Palestinian labor, military service obligations, and displacement of Israelis due to regional conflicts have contributed to the economic challenges.
The prolonged war situation has led to disruptions in various sectors, with investments, particularly in construction, seeing a significant decline. Lowering interest rates at this point could exacerbate the gap between demand and supply, leading to further price increases, especially in housing costs.
The current geopolitical risk has also affected investor sentiment, leading to a higher demand for returns. Lowering interest rates in such an uncertain environment could result in currency depreciation. The recent volatility of the shekel against the dollar reflects these concerns.
The ongoing war has contributed to an increase in the budget deficit, prompting the central bank to urge the government to take necessary steps in creating a credible 2025 state budget. Failure to address spending cuts and tax increases may further impact monetary policy decisions.
The decision to maintain interest rates in Israel reflects the challenges posed by inflation, geopolitical risks, and fiscal concerns. The central bank’s cautious approach aims to ensure stability in the face of economic uncertainty and to address the widening gap between demand and supply in the market.