Bank of Israel Maintains Steady Interest Rates Amid Inflation Concerns
The Bank of Israel has decided to keep its interest rates steady at 4.5% for the sixth consecutive meeting, reflecting a cautious stance in response to accelerating inflation and weak economic activity stemming from the ongoing war in the Gaza Strip. This decision highlights the central bank's concerns over rising geopolitical tensions and their impact on the Israeli economy.
The central bank's statement emphasized the need for monetary restraint amidst growing uncertainties. The Bank noted, "The continuation of the policy of monetary restraint is in line with economists' expectations due to geopolitical uncertainty and fears that further developments will push prices higher." This indicates a focus on stabilizing markets and supporting economic activity while addressing inflationary pressures.
Economic Growth Slows Significantly
Israel's economy has shown signs of weakness, with growth plummeting from an annual rate of 17.2% in the first quarter to just 0.7% in the second quarter of 2024. The Bank of Israel has revised its growth forecasts for 2024 down to 0.5%, a significant decrease from previous estimates. This slowdown is largely attributed to the ongoing conflict and its repercussions on various sectors, including tourism, agriculture, and construction.
The fiscal deficit is projected to rise to 7.2% of GDP by the end of the year, prompting the government to consider austerity measures and tax increases to balance the budget. Such measures may face opposition from right-wing parties within the government, complicating the fiscal landscape.
Concerns Over Currency Performance and Future Projections
The Israeli shekel has depreciated by 3.4% against the dollar since late August, making it one of the worst-performing currencies globally. This decline, coupled with rising government spending to finance the war, has led to concerns about Israel's economic outlook. Credit rating agencies have responded by downgrading Israel's sovereign rating, citing expectations of a widening budget deficit.
Looking ahead, the Bank of Israel's Monetary Policy Committee has indicated that interest rates are likely to remain unchanged until the third quarter of 2025. Analysts predict that any potential rate cuts will not occur before the latter half of 2025, reflecting the ongoing economic pressures and the need for careful monetary management.
