The decision by the Bank of Israel Monetary Committee to keep the bank’s interest rate at 4.5% was not a great surprise to most people. Given the military tension with Iran, the market was not prepared to bet that the Bank of Israel would cut its interest rate, contrary to earlier expectations. It had been thought that the central bank would alternately cut the rate and retain it, and this was supposed to have been its turn to fall, which did not happen in the end. Besides the security situation, what else influenced the bank’s decision, and what can be expected in the next decision in May?
Mizrahi Tefahot Bank chief strategist Yonie Fanning says, "On the whole, central banks like to start reducing interest rates when it is already pretty clear that the time has come to do so." He says expectations of an interest rate cut were high until the shekel started to weaken a few days ago. "Many of the basic conditions in the Israeli economy are conducive to further interest rate cuts. In fact, had the latest geopolitical escalation occurred a week later or a week earlier, we probably would have seen a rate cut," Fanning says.
Bank Leumi chief economist Gil Bufman says that the decision not to cut the interest rate now, despite the fact that inflation has come within the target range and the high level of the current rate "was explained by significant uncertainty in geopolitical factors."
"Israel’s risk premium, as measured by the CDS premium, is still fairly high, and the Bank of Israel attributes great importance to that," Bufman says.
Commenting on the Bank of Israel’s economic forecast, Bufman says that the bank fears a situation in which in some parts of the economy there is a gap between demand and impaired supply, specifically in the construction sector.
Fanning says that, looking ahead, economic condition still support a reduction in interest rates, as the Bank of Israel Research Department also expects. First and foremost, Fanning refers to the rate of inflation, which was 2.5% in the twelve months to the end of February, within the Bank of Israel’s 1-3% target range. "General inflation is expected to remain at about the current level. At the time of the next interest rate announcement, we would expect that greater confidence that we will not exceed the inflation target range will allow an interest rate cut at that stage," he says.
Bufman agrees, saying, "If the inflation environment continues to consolidate at the upper end of the price stability target range, and if the uncertainty factors stabilize, the Bank of Israel will be able to cut its interest rate in its forthcoming decisions, possibly as early as the end of May 2024."
Published by Globes, Israel business news - en.globes.co.il - on April 9, 2024.
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