Israel to Hold Rates as it Weighs War Inflation, Slowing Economy
(Bloomberg) -- Israel’s central bank is set to hold interest rates for a seventh consecutive time, as it weighs how wars in Gaza and Lebanon are quickening inflation and slowing the economy.
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The Bank of Israel will hold its base rate at 4.5% on Monday, according to all nine analysts surveyed by Bloomberg. It will be the last Monetary Policy Committee meeting until early January.
Governor Amir Yaron has said inflationary pressures brought on by the conflicts against Hamas and Hezbollah will likely keep rate cuts off the table until the second half of 2025.
The country’s annual inflation stood at 3.5% as of October, above the government’s target range of 1% to 3%. That’s largely due to supply-side constraints. The construction and agriculture sectors have been hit by a shortage of Palestinian workers who are banned from entering Israel, causing rent and food prices to rise significantly over the past year.
Israel’s aviation market has also suffered with many international carriers avoiding the country. That’s sent airfare costs soaring.
Inflation may accelerate to as much as 4% after a value added tax increase in January and probably won’t fall back into the bank’s target range before the end of 2025, according to Yoni Fanning, a strategist in Tel Aviv at Mizrahi Tefahot Bank.
At the same time, the central bank sees the economy growing just 0.5% this year, down from its earlier projection of 1.5%.
The shekel’s recent performance may also support a policy of holding rather than raising rates. Since the start of October, the currency’s strengthened 0.7% versus the dollar. In that period, it’s the only one of 31 expanded major currencies tracked by Bloomberg not to have fallen against the dollar.
In addition, cease-fire talks between Israel and Iran-backed Hezbollah have made progress in the past week, even if it’s still unclear whether the warring sides can reach a deal. If they can, that should boost the Israeli economy by encouraging investment and freeing up more soldiers to return to the workforce.
In such a scenario, says Alex Zabezhinsky, chief economist at Meitav DS Investments, the increase in demand won’t prevent the central bank from easing monetary policy.
“We see rates starting to go down during the second half of next year” and ending 2025 at 4%, he said.
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